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INTERNATIONAL  BUSINESS  LIBRARY 

BANKING,  CREDITS 
AND  FINANCE 

BY 

THOMAS  HERBERT  RUSSELL,  A.  M.,  LL.  D. 

EDITOR-IN-CHIEF 

kuthor  of  "Business  Principles  and  Methods,"  "Natural  Resources 
and  National  Wealth,"  etc.,  etc.;  former  Editor-in-Chief 
Webster's  Universal  Dictionary 

ASSISTED  BY 

A  CORPS  OF  BUSINESS  EXPERTS 


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OCPYRIGHT  191»  BT 

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RACINE     -     CHICAGO 


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* 'Business  men  do  not  realize  how  closely  their  banks 
watch  them — ^how  much  the  bank  is  bound  to  know  about 
their  aflfairs— how  much  seemingly  small  things  in  their 
daily  lives  affect  credit.  And  big  things  that  they  some- 
timee  want  to  conceal,  too." 


M712444 


**It  must  be  said,  and  said  whatever  men  may  think  of 
it,  that  the  finances  touch  everything,  help  everything, 
conclude  everything.  They  are  in  the  state  what  blood  is 
in  the  veins  of  the  human  body;  if  it  circulates,  it  carries 
along  with  it  motion  and  life;  if  it  stops,  paralysis  and 
death  supervene.  Good  organization,  good  administration, 
a  good  condition  of  the  finances,  exert,  therefore,  imperi- 
ously, everywhere  and  always,  a  positive,  healthful  and 
vivifying  action  upon  the  government  of  a  country  and 
the  prosperity  of  its  people." 


ASSOCIATE  EDITORS. 

RicHAED  Canning,  President  Northwestern  Finance  Company, 
Minneapolis,  Minn. 

H.  M.  Coombs,  special  lecturer  on  Credits  and  Collections,  Inter- 
national Law  and  Business  Institute. 

James  J.  Ceaig,  LL.D.,  special  lecturer  on  Insurance,  International 
Law  and  Business  Institute. 

C.  A.  EcKLUND,  special  lecturer  on  Accounting  and  Auditing  and 
B^inancial  Management,  International  Law  and  Business  Institute. 

W.  J.  Jackman,  former  managing  editor  of  the  Chicago  Journal ; 
Sunday  editor  of  The  Inter  Ocean,  etc. 

G.  A.  Obth,  adjuster  Travelers'  Insurance  Co. 

C.  N.  Smith,  special  lecturer  on  Business  Systems,  International 
Law  and  Business  Institute. 

J.  T.  Thompson,  formerly  of  the  Ontario  bar. 

A.  C.  Wilkinson,  special  lecturer  on  Salesmanship  and  Advertis- 
ing, International  Law  and  Business  Institute. 

Oeorge  E.  Young,  of  the  Minnesota  bar,  special  lecturer  on  Commer- 
cial Law  and  Corporations,  International  Law  and  Business  Institute. 

C.  E.  Zimmerman,  expert  on  Publicity  and  Sales  Promotion, 
Chicago. 

AUTHORITIES  CONSULTED. 

Otbus  C.  Adams,  author  of  "A  Text-Book  of  Commercial  Geogra- 
pihy." 

Joseph  A.  Arnold,  Editor  and  Chief  of  Division  of  Publications, 
U.  S.  Department  of  Agriculture. 

W.  J.  Ashley,  M.  A.,  professor  of  Economic  History  in  Harvard 
University;  author  of  "An  Introduction  to  English  Economic  History 
and  Theory." 

Harry  C.  Bentlet,  C.  P.  A.,  author  of  "Corporate  Finance  and 
Accounting." 

Albert  S.  Bolles,  Ph.D.,  LL.D.,  Author  of  "Money,  Banking,  and 
Finance." 

Right  Honorable  James  Bbyce,  British  Ambassador  to  the  United 
States;  author  of  "The  American  Commonwealth." 

Andrew  Carnegie,  author  of  "The  Empire  of  Business,"  "The 
Gospel  of  Wealth,"  "Triumphant  Democracy,"  etc.,  etc. 

Charles  U.  Carpenter,  author  of  "Profit-Making  in  Shop  and  Fac- 
tory Management." 

4 


AUTHORITIES  CONSULTED. 


A.  Hamilton  Chubch,  author  of  "the  Proper  Distribution  of  Ex- 
pense Burden." 

Thomas  Conyngtois-,  of  the  New  York  bar;  author  of  "Corporate 
Organization,"  "Corporate  Management"  "The  Modern  Corporation,  Its 
Mechanism,  Methods,  Formation  and  Management,"  etc. 

William  Amelius  Cobbion,  author  of  "The  Principles  of  Salesman- 
ship, Deportment  and  System." 

Db.  Stuabt  Daggett,  University  of  California,  author  of  "Railroad 
Reorganization." 

Lawbence  R.  Dicksee,  F.  C.  A.,  professor  of  Accounting  at  the 
University  of  Birmingham;  author  of  "OfiBce  Organization  and  Man- 
agement." 

Hon.  John  F.  Dbyden,  former  United  States  Senator;  president  of 
The  Prudential  Insurance  Company  of  America;  author  of  "Life  In- 
surance as  a  Career,"  "Uniform  Law  and  Legislation  on  Life  Insur- 
ance," etc.,  etc. 

E.  Dana  Duband,  Director  of  the  Census  Bureau,  Washington,  D.  C. 

Seymoub  Eaton,  Director  of  the  Department  of  Industry  and  Fi- 
nance, Drexel  Institute,  Philadelphia;  author  of  "How  To  Do  Business." 

James  H.  Eckels,  former  Comptroller  of  the  Currency;  author  of 
"The  Methods  of  Banking,"  etc. 

Harbington  Emebson,  author  of  "Efficiency  as  a  Basis  for  Opera- 
tion and  Wages." 

A.  NoETON  Fitch,  of  the  Tacoma  (Wash.)  bar,  formerly  of  the 
Rochester  (New  York)  bar;  author  of  "New  Commercial  Law." 

E.  K.  FoLTZ,  author  of  "The  Federal  Civil  Service  as  a  Career." 

David  R.  Fobgan,  president  of  the  National  City  Bank  of  Chi- 
cago. 

H.  L.  Gantt,  member  of  the  American  Society  of  Mechanical  En- 
gineers; author  of  "Training  Workmen  in  Habits  of  Industry  and  Co- 
operation," etc.,  etc. 

J.  W.  Gilbabt,  F.  R.  S.,  formerly  Director  and  General  Manager  of 
the  London  and  Westminster  Bank;  author  of  "The  History,  Principles, 
and  Practice  of  Banking." 

James  C.  Gipe,  Secretary  Joint  Committee  on  Conservation,  Wash- 
ington, D.  C. 

Thomas  H.  Goddard,  author  of  "History  of  Banking  Institutions  of 
Europe  and  the  United  States." 

John  H.  Gbay,  Ph.  D.,  professor  of  Economics  and  Political  Sci- 
ence, University  of  Minnesota. 

W.  C.  HoLMAN,  former  editor  of  Salesmanship  Magazine. 

Ebnest  W.  Huffcut,  former  Dean  of  the  Cornell  University  Col- 
lege of  Law;  author  of  "The  Elements  of  Business  Law." 

Jbnkin  Lloyd  Jones,  Abraham  Lincoln  Center,  Chicago. 


AUTHORITIES  CONSULTED. 


Hon.  W.  L.  Mackenzie  King,  C.  M.  G.,  M.  P.,  Minister  of  Labor, 
Dominion  of  Canada. 

M.  G.  LaRochelle,  Joint  Commissioner,  Civil  Service  Commission 
of  Canada,  Ottawa,  Canada. 

Pbof.  J.  Laubence  Laughlin,  head  of  the  Department  of  Political 
Economy,  University  of  Chicago. 

Patji,  Mobton,  president  of  The  Equitable  Life  Assurance  Company. 

Alexandeb  Dana  Notes,  financial  editor  "New  York  Evening  Post." 

Geobge  W.  Pebkins,  23  Wall  Street,  New  York. 

Cabl  Horton  Piebce,  lecturer  on  "Salesman-Making,"  New  York 
Y.  M.  C.  A.;  author  of  "Scientific  Salesmanship." 

Chas.  F.  Roland,  Secretary  of  the  Winnipeg  Development  and  In- 
dustrial Bureau,  Winnipeg,  Manitoba. 

William  A.  Schonfeld,  attorney  and  counselor-at-law ;  author  of 
"A  Compendium  of  Laws." 

Wm.  a.  Scott,  director  of  Course  in  Commerce,  University  of  Wis- 
consin; author  of  "Money  and  Banking,"  etc.,  etc. 

Edwin  R.  A.  Seligman,  LL.  D.,  author  of  "Essays  in  Taxation," 
"The  Economic  Interpretation  of  History,"  "Principles  of  Econom- 
ics," etc.,  etc. 

Abthub  B.  Shelton,  Secretary  of  the  National  Monetary  Commit- 
sion,  Washington,  D.  C. 

Adam  Smith,  LL.  D.,  author  of  "The  Wealth  of  Nations." 

Goldwin  Smith,  D.  C.  L.,  LL.  D.,  author  of  "The  Relations  Be- 
tween America  and  England,"  "Canada  and  the  Canadian  Question," 
"History  of  the  United  States,"  "Essays  on  Questions  of  the  Day,"  etc., 
etc. 

Samuel  E.  Spabling,  Ph.  D.,  author  of  "Business  Organization." 

Edward  W.  Spenceb,  of  the  Milwaukee  bar,  author  of  "Manual  of 
Commercial  Law,"  and  "The  Elements  of  Commercial  Law." 

F.  W.  Taussig,  professor  of  Political  Economy  in  Harvard  Uni- 
versity; author  of  "Wages  and  Capital." 

Frederick  Winslow  Taylor,  expert  in  Industrial  Organization, 
Philadelphia,  Pa.;  author  of  "A  Piece-Rate  System,"  "Shop  Manage- 
ment," etc.,  etc. 

R.  Whately  Cooke  Taylob,  author  of  "Introduction  to  a  History 
of  the  Factory  System." 

Henby  W.  Thurston,  head  of  the  Department  of  Social  and  Eco- 
nomic Science  in  the  Chicago  Normal  School;  author  of  "Economics 
and  Industrial  History." 

Bybon  E.  Walker,  president  of  The  Canadian  Bank  of  Commerce, 
Toronto. 

Hon.  John  Wanamakeb,  Philadelphia. 

Algebnon  Wareen,  author  of  "Commercial  Traveling:  Its  Features, 
Past  and  Present." 


Banking 

AND 

Finance 


CONTENTS. 


Associate  Editors  and  Authorities 4 

Introduction 17 

CHAPTER  I.     Origin  and  Use  of  Money.  .  i 25 

True  Origin  and  Function  of 
Money — Man  Lives  by  Exchange — 
Early  Mediums  of  Exchange — 
Use  of  Metal  as  Money — ^Various 
Metals  Used — Origin  of  Coinage — 
The  First  Stamped  Metals — In- 
stitution of  Coins — Pounds,  Shill- 
ings, and  Pence — Values  Have 
Varied — The  Universal  Instrument 
of  Commerce. 

CHAPTER         II.    The  Function  of  Banks 35 

What  is  a  Banker — Private  and 
Public  Banks — The  Business  of 
Banking — The  Disposable  Means  of 
a  Bank — The  Expenses  of  a  Bank — 
The  Profits  of  a  Bank — Banks  as 
Commercial  Institutions — Classifica- 
tion of  Banks — Public  or  Incorpor- 
ated Banks — National  Banks — Banks 
of  Discount  and  Deposit — Savings 
Banks — Trust  Companies, 

CHAPTER        III.     The  Origin  of  Banking. 43 

The  Jewish  Money-Changers — The 
Banks  of  Ancient  Greece — ^Methods 
of  Athenian  Bankers— Commerce 
Gave  Rise  to  Bankers — The  First 
Joint-Stock  Bank — The  Banks  of 
Ancient  Rome — Origin  of  the  Word 
* '  Bank '  '—The  Florentine  Bankers— 
The  Earliest  National  Banks — The 
Bank  of  Venice— The  Bank  of 
Barcelona — The  Bank  of  Genoa — 
The  First  Bills  of  Exchange— The 
Bank  of  Amsterdam — ^Bank  Money 
9 


10 


CONTENTS. 


CHAPTER    IV. 


CHAPTER 


CHAPTER    VI. 


at  a  Premium — The  Bank  Capital — 
Managed  by  the  Burgomasters — A 
Model  for  European  Banks — The 
Bank  of  North  America. 

Eaely  Banking  in  England 65 

1.  Money-Changing — The  OflSce  of 
Royal  Exchanger — Re-established 
by  Charles  I— The  King's  Pre- 
rogative. 

2.  Money-Lending — Early  Rates 
of  Interest — Expulsion  of  the 
Jews — The  Lombards  as  Usurers — 
Interest  Made  Legal. 

3.  Money-Borrowing — The  Banking 
Goldsmiths — Blamed  for  Money 
Scarcity — The  First  Run  on  a 
Bank. 

4.  Transmission  of  Money — The 
Bank  of  England — Opposition  of 
Foreign  Competitors — The  Act  of 
Parliament — Provisions  of  the 
Charter — Agents  for  the  Govern- 
ment— Events  in  the  Bank's  His- 
tory. 

The  Utility  of  Banking 93 

The  Safe-Keeping  of  Money— The 
Allowance  of  Interest — The  Loaning 
of  Money — The  Transmission  of 
Money — Exchange  of  Currency — An 
Economy  of  Time — Collection  of 
Drafts — A  Record  of  Expenditures 
— Safe  Deposit  for  Valuables — 
Valuable  Help  in  Business — A  Moral 
Influence  for  Good. 

The  Methods  of  Banking 105 

Organization  of  Banks — The  Officers 
of  a  Bank — Suggestions  to  Bank 
Clerks — The  Bank's  Cash — Counter- 
feit Notes — Bank  Loans — Accurate 
Interest— Money  *'0n  Call"— Col- 
laterals— The  Name  "Bank"— Bor- 
rowing from  Banks — Rates  for 
Loans — ^When  Interest  Accrues — 
Forged   Indorsements — Trust   Com- 


CONTENTS. 


11 


CHAPTER       VII. 


CHAPTER     VIII. 


CHAPTER 


IX. 


panies — Safe  Deposit  Vaults — A  De- 
positor's Credit — Giving  Bonds  for 
Faithful  Service — Use  of  Instru- 
ments of  Credit — Emergency  Cur- 
rency— Usury  and  its  Penalty — 
Bank  Examinations — The  Cheque 
Bank  —  Bank  Statements  —  Bank 
Debits  and  Credits — Value  of  Paper 
Offered  for  Discount — ^Mercantile 
Agencies — Savings  Banks — Defalca- 
tions and  Embezzlements — ^Com- 
mercial Crises. 

The  Cleabing-House  System 135 

Check  Collections — The  Wanderings 
of  Checks — Clearing-House  Manage- 
ment— Foreign  Clearing-Houses. 

Deposits  and  Depositors •.  .143 

Opening  a  Bank  Account — Hints  for 
Depositors — Bank  Checks — Identifi- 
cation— A  Banker's  Hints — Check 
Indorsements — Cashing  Your  Own 
Check — Checks  for  Special  Purposes 
— * '  No  Funds ' ' — Stopping  Payment 
— Canceling  Checks — Checks  Pre- 
sented after  Death — Checks  Should 
Be  Numbered— Certificates  of  De- 
posit —  Certified  Checks  —  Bank 
Drafts — "Kiting"  Checks — Forged 
Checks — Signatures — Suggestions  to 
Bank  Depositors. 

Notes  and  Drafts 163 

Promissory  Notes — Date  of  a  Note — 
Value  Received — Accommodation — 
Interest  Notes— Indorser  of  a  Note 
— Presentation  for  Payment — Pro- 
test— Date  of  Maturity — Payment  on 
a  Note — A  Joint  Note — Signature  to 
a  Note — Commercial  Drafts — ^CoUejj- 
tions  by  Draft — Draft  Notices — 
When  are  Accounts  Due — Collec- 
tions through  Banks — Three-Party 
Drafts — "No  Protest" — Discounting 
Drafts — The  Advantages  of  Taking 


12 


CONTENTS. 


a  Note — ^Discounting  Paper — Drafts 
and  Bills  of  Lading — Protest  Notice 
— Overdue  Paper — Who  is  a  Bona- 
Fide  Holder?— A  Set-off— Notice  of 
Non-Payment  of  a  Note — A  "Mark" 
Signature — An  Important  Provision 
— Power  of  Attorney — The  Return 
of  Vouchers — Due  Bills — How  Notes 
Differ  from  other  Ck)ntracts — Legal 
Tender  —  Note  Brokers  —  Single- 
Name  Paper — Demand  Collateral 
Note — Waiver  of  Demand  and  Notice 
— A  Judgment  Note — Collection 
Laws. 

CHAPTER         X.     Credit  AND  Exchange 185 

Foreign  and  Domestic  Commercial 
Credit — History  of  Financial  Ex- 
change— Principles  of  Exchange — 
Changes  in  Exchange  Rates — Ex- 
change Terms — Domestic  Exchange 
—The  Cost  of  Shipping  Gold— The 
World's  Financial  Center  —  The 
World's  Currencies — Value  in  Gold 
of  the  World's  Coins — English 
Money — Canadian  Money — Letters 
of  Credit. 

CHAPTER         XL    Banking  in  Canada 209 

Bank  Charters — Liability  of  Share- 
holders— Term  of  the  Charter — 
Banking  Principles  —  Historical 
Sketch— The  Condition  at  Confed- 
eration— Note  Issues  —  Distinctive 
Features — The  Basis  of  Elasticity 
— Currency  and  Trade  Require- 
ments— ^Bond — Secured  Currency — 
Convertibility  and  Security — The 
Borrower  and  the  Branch  System — 
Supplying  Local  Wants — The  De- 
positor— Competitors  for  Deposits — 
Interest  on  Deposits — ^Bank  Inspec- 
tion— Reserves — Chartered  Banks  of 
Canada. 


CONTENTS. 


13 


CHAPTER       XII. 


CHAPTER     XIII. 


CHAPTER     XIV. 


CHAPTER       XV. 


Bank   Credits 245 

The  Laws  Governing  Credit — State- 
ments from  Borrowers — The  Credit 
Department — Analysis  of  Statements 
— Principles  and  Rules  of  Credit 
Science — Accuracy  is  Required- 
Value  of  the  Accountant — ^Value 
of  the  Engineer — Inaccurate  and 
Dishonest  Statements — All  Benefited 
by  Examination — Practical  Features 
of  Bank  Credits — Typical  Balance 
Sheets — ^Net  "Worth  of  Borrowers — 
Failure  of  Uniform  Credit  Tests — 
To  Encourage  Manufacturers — Im- 
portance of  Credit  Science. 

The  Comptroller's  Office 265 

An  Independent  Office — The  Organ- 
iation  Department — National  Bank 
Examiners — The  Department  of  Re- 
ports— The  Redemption  Department 
— The  Issuing  Department — In- 
solvent Banks — Responsibility  of  the 
Office — Liquidation  of  Assets. 

Monetary  System  of  the  U.  S 275 

No.  1 — Gold  and  Silver  Coinage — 
Provisions  of  the  Act  of  1873— The 
Silver  Act  of  1878— The  Standard  of 
Value — Coins  and  Paper  Currency 
— Gold  Coins — Silver  Coins — Sub- 
sidiary Silver — Issue  of  Standard 
Silver  Dollars  and  Subsidiary  Silver 
Coin— The  Silver  Act  of  1890— 
Meaning  of  16  to  1— Standard  Bull- 
ion— What  is  Seigniorage  ? — Coinage 
of  Gold — Coinage  of  Silver — Trade 
Dollars — Free  and  Unlimited  Coin- 
age of  Silver — Unlimited  Coinage — 
Sales  of  Gold — Redemption — For- 
eign Coins  Not  Legal  Tender — De- 
nominations, Weight,  and  Fineness 
of  the  Coins  of  the  United  States. 

Monetary  System  of  the  U.  S 297 

No.  2 — Paper  Money — United  States 
Notes  —  Gold     Certificates  —  Silver 


14 


CONTENTS. 


CHAPTER    XVI. 


Certificates — Treasury  Notes,  Act  of 
July  14,  1890 — Fractional  Currency 
— National-Bank  Currency — Author- 
izing Acts — Amendatory  Acts- 
Security — Profits  on  Circulation — 
Profits  on  Capital  Invested — Reports 
and  Examinations — Capital  Based 
on  Population — Amount  of  National- 
Bank  Circulation. 

The  Federal  Reserve  System 307 

The  Act  of  1913— Establishment  of 
Twelve  Reserve  Banks  —  Purposes 
and  Provisions  of  the  Act  —  A  New 
Epoch  in  Banking — How  Panics  are 
Prevented  —  The  Federal  Reserve 
Board  and  Council,  etc.  —  A  Great 
Constructive  Measure. 

CHAPTER   XVII.    Monetary  Events  Since  1786 321 

CHAPTER  XVIII.     Foreign  Exchange,  Part  1 6'Sl 

Foreign  Departments  Supersede 
Brokers — An  Opportunity  for  Stu- 
dents— What  Foreign  Exchange  Is 
— Magnitude  of  Foreign  Trade — 
Knowledge  of  Monetary  Systems — 
The  Only  International  Money — 
How  Gold  Shipments  Are  Handled 
— Commercial  Bars  of  Gold — 
' '  Money  of  Account '  * — European 
Moneys — The  British  System — 
"Sterling"  Exchange— Two  Kinds 
of  Exchange — Rate  of  Exchange — 
Effect  of  Discount  Rates — Par  of 
Exchange — Quotations  of  Rates — 
Peculiarity  of  French  Quotations — 
German  and  English  Quotations — 
Meaning  of  Newspaper  Quotations — 
Before  and  After  Clearings. 

CHAPTER     XIX.    Foreign  Exchange,  Part  2 359 

Commerce  and  Exchange — A  Typ- 
ical Transaction — ^Foundation  of 
Foreign  Exchange — Buying  Com- 
mercial Bills — ^Hypothecation  Cer- 
tificates— Certificates   of   Insurance, 


CONTENTS. 


15 


CHAPTER       XX. 


Etc. — Various  Rates  of  Discount — 
The  Bank  of  England  Rate— Safe 
and  Unsafe  Bills— Clean  Bills  of  Ex- 
change— Documentary  Bills — Cost 
of  Revenue  Stamps — Miscellaneous 
Charges — Complicated  Transactions 
— German  Requirements — Conveni- 
ence of  Sterling  Exchange — Precau- 
tions Against  Wrong  Payment 

Investments  377 

Bank  Deposits  are  Largely  Credits 
— Little  Actual  Cash  Demanded — 
The  Potency  of  Credit — Recent 
Expansion  of  Credit — Effect  of  Pub- 
lic Confidence — Funds  Available  for 
Investment — Increase  of  Investment 
Securities — What  Constitutes  De- 
sirability— 1.  Public  Securities — 
11.  Real-Estate  Securities  —  III. 
Corporation  Bonds — IV.  Stocks — 
^  A  Safe  General  Rule. 

CHAPTER     XXI.     The  Stock  Exchange 403 

Technical  Terms  of  Stock  Exchanges 
—  Brokers  —  Stock '  Companies  — 
Shares  of  Stock — Capital  Stock  In- 
creased —  Preferred  Stock — Divi- 
dends— Surplus  Fund  —  Treasury 
Stock — Guaranteed  Stock — ^Watered 
Stock — Limited  Liability  Com- 
panies— Sale  of  Stock. 

Questions  fob  Review 417 


INTRODUCTION. 

At  first  sight  it  may  seem  that  the  study  of  principles 
and  methods  of  Banking  and  Finance  might  be  confined 
to  those  engaged  in  the  business  of  banking  or  con- 
cerned with  the  actual  problems  of  high  finance;  but  a 
brief  consideration  of  the  matter  will  soon  enable  the 
student  of  modern  business  to  decide  for  himself  that 
the  more  he  knows  about  banking  and  financial  manage 
ment  of  concerns  large  and  small,  the  better  equipped 
he  will  be  to  seize  the  fleeting  opportunities  of  twentieth- 
century  business  life. 

It  is  not  only  bankers  and  young  men  who  aspire  to 
become  bankers  or  financiers,  therefore,  they  may  prof- 
itably study  the  theories,  history  and  practice  of  banking 
and  finance.  Business  men  of  all  classes,  and  ambitious 
yomig  men  generally,  may  devote  time  and  attention  to 
these  subjects  with  almost  absolute  certainty  that  the 
knowledge  thus  acquired  will  greatly  profit  them  sooner 
or  later. 

Every  business  man  has  more  or  less  to  do  with  banks 
and  banking.  It  stands  to  reason,  therefore,  that  he  can- 
not obtain  too  much  knowledge  of  banking  methods. 
The  greater  his  business,  the  more  need  he  has  of  spe- 
cialized knowledge  on  the  subject.  It  is  an  important 
part  of  a  liberal  education  in  Business  Administration. 

It  may  be  remarked  in  passing,  that  the  opportunities 
offered  to  young  men  trained  in  matters  of  finance  were 

17 

I.B.L.  Vol.  4—2 


18  INTRODUCTION. 

never  so  great  or  so  numerous  as  they  are  at  the  present 
day.  The  general  demand  for  specialized  knowledge  in 
business  is  fully  exemplified  by  the  strong  demand  for 
young  men  fitted  by  study  to  enter  the  employ  of  the 
great  banks  and  financial  houses  that  are  a  notable  out- 
growth of  modem  business.  It  is  reahzed  by  financiers 
generally  that  the  young  men  thus  partially  equipped 
for  their  service  afford  splendid  material  for  the  practical 
training  in  banking  and  financial  management  which 
can  be  obtained  only  by  actual  experience  in  the  bank, 
trust  company,  or  other  financial  institution. 

It  must  never  be  forgotten  that  the  bases  of  all  success 
in  the  business  world  of  today  are  Character  and  Knowl- 
edge. These  may  well  be  linked  together  side  by  side, 
since  it  takes  a  man  of  character  to  enter  upon  the  con- 
scientious pursuit  of  knowledge.  The  young  man  who 
possesses  this  combination — character  and  knowledge — 
is  the  young  man  bankers  and  financiers  are  looking  for. 

Economics. — ^As  the  groundwork  for  study  of  Bank- 
ing and  Finance,  some  knowledge  of  economics  is  desir- 
able, especially  that  portion  of  the  science  which  deals 
with  the  theory  of  money,  the  standards  of  value,  and 
the  relation  of  commerce  and  credit.  The  student  should 
fully  realize  the  importance  of  the  subject  of  finance,  and 
this  can  hardly  be  over-estimated ;  for,  as  a  French  writ- 
er sagely  remarks.  "It  must  be  said,  and  said  what- 
ever men  may  think  of  it  that  the  finances  touch  every- 
thing, help  everything,  conclude  everything.  They  are 
in  the  state  what  blood  is  in  the  veins  of  the  human  body; 
if  it  circulates,  it  carries  along  with  it  motion  and  life;  if 
it  stops,  paralysis  and  death  supervene.    Good  organiza- 


INTRODUCTION.  19 

tion,  good  administration,  a  good  condition  of  the  finan- 
ces, exert  therefore  imperiously,  everywhere  and  always, 
a  positive,  healthful  and  vivifying  action  upon  the  gov- 
ernment of  a  country  and  the  prosperity  of  its  people." 

Realizing  the  importance  of  the  finances  in  the  public 
economy,  the  student  will  readily  understand  the  utility 
of  banking  in  all  commercial  communities.  He  will 
learn  how  the  banker  stands  between  the  capitalist  and 
the  borrower,  as  the  medium  whereby  arrangements  are 
made  for  carrying  on  and  expanding  domestic  trade 
and  international  commerce.  He  will  see  why  the  bank- 
er becomes  a  prominent  and  esteemed  citizen  of  the  com- 
munity, and  how  great  is  the  banker's  influence,  indi- 
vidually and  collectively,  in  keeping  business  on  a  safe 
basis;  checking  the  over-enthusiastic  and  the  purely 
speculative,  but  ever  promoting  enterprise  on  the  part  of 
worthy  men. 

History  of  Banks  and  Banking. — A  knowledge  of  the 
history  of  banks  is  desirable  because  it  gives  a  clearer 
understanding  of  the  essential  principles  on  which  mod- 
em banking  systems  are  founded.  The  time  spent  in 
studying  the  historical  sections  of  this  volume  will  there- 
fore be  well  spent,  and  these  sections  will  be  found  ex- 
tremely interesting  in  their  presentation  of  the  subject. 

Classes  of  Banks.^-The  various  classes  of  banking  in- 
stitutions in  all  parts  of  the  world  are  dealt  with.  Ui> 
der  this  heading,  we  note  the  distinction  between  public 
and  private  banks  and  deal  with  the  national  banks 
and  state  banks  in  the  United  States,  and  with  the  Cana- 
dian banking  system.    The  subject  of  savings  banks  re- 


20  INTRODUCTION. 

eeives  due  attention,  and  the  modern  development  of 
loan  and  trust  companies  is  fully  treated. 

Deposits  and  Depositors. — In  this  branch  of  the  gen- 
eral subject,  the  student  will  learn  how  bank  accounts  are 
opened;  how  checks  are  drawn,  indorsed,  certified,  etc.; 
and  how  the  deposits  are  handled  by  the  bank;  also  the 
rights  and  duties  of  depositors. 

Laws  of  Banking. — It  will  be  advisable  to  obtain 
some  knowledge  of  the  laws  under  which  banks  are  or- 
ganized and  operated,  and  these  are  presented  in  con- 
venient form  for  study  and  reference. 

Bank  Organization. — The  various  steps  attending  the 
organization  of  a  bank,  particularly  in  the  United  States 
and  Canada,  are  clearly  shown,  also  the  duties  of  direc- 
tors and  officers ;  the  functions,  rights  and  obligations  6f 
shareholders;  requirements  as  to  meetings,  etc. 

Bank  Circulation. — As  part  of  the  monetary  system, 
bank  circulation  is  treated  at  length.  The  principles  and 
methods  of  making  bank  note  issues  in  the  United  States 
and  Canada  receive  particular  attention. 

Negotiable  Paper. — The  manner  in  which  a  bank  han- 
dles commercial  paper  and  other  negotiable  instruments 
is  not  only  an  important  but  an  interesting  feature  of 
the  subject  of  banking,  hence  it  should  and  does  receive 
considerable  attention.  In  this  connection  the  subject 
of  bank  collections  is  also  dealt  v/ith. 

Loans. — One  of  the  most  responsible  duties  of  a 
banker  is  the  making  of  loans.  The  methods  used  in 
banks  to  judge  of  the  reliability  and  credit  of  applicants 
for  loans  will  well  repay  study,  and  all  engaged  in  busi- 
ness should  have  considerable  knowledge  on  the  point. 


INTRODUCTION.  21 

Bank  Credits. — In  recent  years,  bank  credits  have  been 
reduced  practically  to  a  science.  We  shall  see  how  this 
has  been  brought  about,  and  incidentally  study  the  whole 
question  of  commercial  reports  in  connection  with  bank 
credits. 

Collections. — The  methods  by  which  a  bank  makes  its 
collections  on  commercial  and  other  negotiable  paper  are 
discussed.  These  too  have  been  systematized  within  the 
past  few  years  and  the  student  of  business  can  assimi- 
late with  advantage  all  the  information  given  on  the  sub- 
ject. 

Clearing  Houses. — The  study  of  banking  would  be  in- 
complete without  some  knowledge  of  the  system  whereby 
the  work  of  banks  is  facilitated  by  means  of  clearing 
houses.  The  clearing  house  is  remarkable  among  mod- 
ern developments  of  business  as  an  institution  for  the  ex- 
change and  settlement  of  checks  drawn  on  a  variety  of 
banks.  It  greatly  economizes  time,  money  and  labor. 
The  methods,  membership,  authority,  and  organization 
of  clearing  houses  are  discussed,  and  the  operations  of 
clearing  and  payment  of  balances  are  fully  described. 

Bank  Reserves. — It  is  astonishing  how  many  men  of 
business,  otherwise  well  informed,  lack  precise  informa- 
tion upon  such  matters  as  the  nature  of  bank  reserves  and 
government  requirements  regarding  the  reserve.  Of  late 
years,  there  has  been  a  tendency  on  the  part  of  banks 
to  give  the  public  a  better  understanding  of  their  peri- 
odical reports,  while  the  movement  toward  a  central 
reserve  bank  has  by  its  propaganda  added  to  the  general 
information  on  the  subject,  but  the  average  business  man 
and  all  students  of  business  may  well  read  up  on  this 


22  INTEODUCTION. 

point,  since  it  is  an  important  feature  of  American  bank- 
ing. No  one  can  be  said  to  understand  the  methods  of 
banking  unless  he  understands  the  question  of  the  re- 
serve; hence  the  matter  is  discussed  at  length  in  these 
pages. 

Postal  Savings  Banks, — The  postal  savings  bank  sys- 
tems of  Europe,  particularly  that  of  Great  Britain,  need 
to  be  understood  in  order  that  we  may  intelligently  con- 
sider the  mooted  question  of  the  establishment  of  a  sim- 
ilar system  in  the  United  States.  Canada  follows  the 
British  system  to  a  considerable  extent. 

Domestic  and  Foreign  Exchange. — The  question  of 
exchange  in  its  relation  to  commerce,  both  domestic  and 
foreign,  and  to  international  affairs  generally,  is  of  the 
utmost  importance.  All  matters  pertaining  to  foreign 
exchange  are  particularly  interesting,  and  a  complete  dis- 
cussion of  the  question  by  an  acknowledged  authority 
will  be  found  in  the  chapters  devoted  to  the  subject. 

Investments. — All  business  men  are  interested  in  the 
subject  of  investments,  hence  it  is  well  to  study  the  var- 
ious kinds  of  investments  offered  to  capital,  and  to  obtain 
an  idea  of  the  relative  value  of  each.  The  chapter  on  this 
subject  is  from  the  pen  of  an  investment  expert  of  inter- 
national reputation,  a  Western  banker  held  in  universal 
esteem. 

Corporation  Finance. — In  modern  business,  banks, 
trust  companies,  and  private  bankers  frequently  under- 
take to  finance  commercial  enterprises  and  public  under- 
takings, hence  the  subject  of  corporation  finance  is  close- 
ly interwoven  with  that  of  banking,  and  some  time  and 


INTRODUCTION.  23 

attention  may  profitably  be  devoted  by  the  student  to 
this  subject. 

Monetary  Systems. — Every  student  of  business  should 
have  a  thorough  understanding  of  the  monetary  system 
of  his  own  country.  We  have  fully  described  the  mone- 
tary system  of  the  United  States  in  two  parts, — first  the 
coinage  of  gold  and  silver,  and  second,  the  paper  money, 
— and  have  also  given  a  historical  review  of  the  monetary 
events  of  the  world  since  1786,  which  will  be  found  ex- 
tremely useful  for  reference. 

Government,  State  and  Municipal  Bonds. — The  na- 
ture of  government  bonds  and  of  other  securities  based  on 
state  and  municipal  obhgations  affords  a  wide  field  for 
study.  The  bond  business  is  a  great  and  growing  branch 
of  modern  affairs,  and  there  is  no  branch  in  which  close 
and  constant  study  of  the  situation  is  more  imperatively 
necessary  than  in  this.  We  have  sketched  the  broad  prin- 
ciples underlying  bond  issues,  and  the  safeguards  that 
experience  has  thrown  round  about  them.  All  that  is  said 
upon  the  subject  in  the  following  pages  is  worthy  of 
study. 

BoomSy  Panics  and  Depressions. — Some  space  is  de- 
voted to  an  examination  into  the  causes  of  panics  and  de- 
pressions, of  which  a  close  study  has  been  made  by  many 
eminent  writers  on  finance.  The  question  of  booms  and 
their  effect  also  receives  attention.  These  conditions  oc- 
cur and  recur  in  Europe  and  in  America.  The  English- 
speaking  pubhc  on  both  sides  of  the  Atlantic  seem  par- 
ticularly susceptible  to  both  booms  and  depressions,  save 
perhaps  in  the  case  of  Canada,  where  public  sanity  usu- 
ally prevails  to  a  remarkable  degree. 


24  INTRODUCTION. 

The  method  followed  throughout  this  work  has  been 
to  deal  chiefly  with  principles  and  methods  of  more  or 
less  general  application  rather  than  with  individual  or 
local  methods.  This  is  for  the  advantage  of  the  great 
majority  of  students  of  business, — for  the  greatest  good 
of  the  greatest  number,  who  will  be  enabled  by  a  knowl- 
edge of  the  general  principles  and  methods  of  banking 
and  finance  to  comprehend  individual  or  local  variations 
in  method  where  these  may  occur. 


CHAPTER  I. 

ORIGIN  AND  USE  OF  MONEY. 

The  true  origin  and  function  of  money  were  ex- 
pounded at  least  as  early  as  the  second  century,  when  the 
great  Roman  Paullus  wrote:  "The  origin  of  buying  and 
selling  is  in  exchange.  Formerly  there  were  no  coins, 
and  merchandise  was  in  no  way  distinguished  from 
money.  Every  man,  according  to  the  necessity  of  the 
time  and  of  things,  exchanged  what  was  useless  to  him 
for  what  was  useful,  and  it  was  generally  the  case  that 
what  one  had  abundance  of,  another  was  deficient  in. 
But  as  it  did  not  always  easily  happen  that  when  one  per- 
son had  what  another  desired,  that  other  had  also  what 
the  first  desired,  a  substance  was  chosen  whose  general 
and  durable  value  obviated  the  difficulties  of  exchange  by 
being  a  common  measure.  This  substance,  having  re- 
ceived a  public  stamp,  has  use  and  value  less  as  a  material 
than  as  a  quantity,  and  is  no  longer  called  merchandise, 
but  money" 

Jilan  Lives  by  Exchange. 

When  the  division  of  labor  has  been  once  thoroughly 
established  in  a  community,  says  Adam  Smith,  it  is  but 
a  very  small  part  of  a  man's  wants  which  the  produce  of 
his  own  labor  can  supply.  He  supplies  the  far  greater 
part  of  them  by  exchanging  that  surplus  part  of  the 
produce  of  his  own  labor,  which  is  over  and  above  his  own 
consumption,  for  such  parts  of  the  produce  of  other 

25 


26  OBIOIN  AND  USE  OF  MONEY. 

men's  labor  as  he  has  occasion  for.  Every  man  thus  lives 
by  exchanging  or  becomes  in  some  measure  a  merchant, 
and  the  society  itself  grows  to  be  what  is  properly  a  com- 
mercial society. 

But  when  the  division  of  labor  first  began  to  take 
place,  this  power  of  exchanging  must  frequently  have 
been  very  much  clogged  and  embarrassed  in  its  opera- 
tions. One  man,  we  may  suppose,  has  more  of  a  certain 
commodity  than  he  himself  has  occasion  for,  while  an- 
other has  less.  The  former  consequently  would  be  glad 
to  dispose  of,  and  the  latter  to  purchase,  a  part  of  this 
superfluity.  But  if  this  latter  should  happen  to  have 
nothing  that  the  former  stands  in  need  of,  no  exchange 
can  be  made  between  them.  The  butcher  has  more  meat 
in  his  shop  that  he  himself  can  consume,  and  the  dairy- 
man and  the  baker  would  each  of  them  be  willing  to  pur- 
chase a  part  of  it.  But  they  have  nothing  to  offer  in  ex- 
change, except  the  different  productions  of  their  re- 
spective trades,  and  the  butcher  is  already  provided  with 
all  the  bread  and  milk  which  he  has  immediate  occasion 
for.  No  exchange  can,  in  this  case,  be  made  between 
them.  He  cannot  be  their  merchant,  nor  they  his  custo- 
mers ;  and  they  are  all  of  them  thus  mutually  less  service- 
able to  one  another.  In  order  to  avoid  the  inconvenience 
of  such  situations  every  prudent  man  in  every  period  of 
society,  after  the  first  establishment  of  the  division  of 
labor,  must  naturally  have  endeavored  to  manage  his  af- 
fairs in  such  a  manner  as  to  have  at  all  times  by  him, 
besides  the  peculiar  produce  of  his  own  industry,  a  cer- 
tain quantity  of  some  one  commodity  or  other,  such  as  he 
imagined  few  people  would  be  likely  to  refuse  in  ex- 
change for  the  produce  of  their  industry. 


OEIGIN  AND  USE  OF   MONEY.  27 

Early  Mediums  af  Exchange. 
Many  different  commodities,  it  is  probable,  were  suc- 
cessively both  thought  of  and  employed  for  this  purpose. 
In  the  rude  ages  of  society,  cattle  are  said  to  have  been 
the  common  instrument  of  commerce;  and,  though  they 
must  have  been  a  most  inconvenient  one,  yet  in  old  time 
we  find  things  were  frequenty  valued  according  to  the 
number  of  cattle  which  had  been  given  in  exchange  for 
them.  The  armor  of  Diomede,  says  Homer,  cost  only 
nine  oxen ;  but  that  of  Glaucus  cost  a  hundred  oxen.  Salt 
was  formerly  the  common  instrument  of  commerce  and 
exchanges  in  Abyssinia ;  a  species  of  shells  in  some  parts 
of  the  coast  of  India;  dried  cod  in  Newfoundland;  to- 
bacco in  Virginia;  sugar  in  some  of  the  West  Indies; 
hides  or  dressed  leather  in  other  countries ;  and  as  late  as 
Adam  Smith's  day  there  was  a  village  in  Scotland  where 
it  was  not  uncommon  for  a  workman  to  carry  nails  in- 
stead of  money  to  the  baker's  shop  or  the  ale-house. 

Use  of  Metal  as  Money. 

"In  all  countries,  however,  men  seem  at  last  to  have 
been  determined  by  irresistible  reasons  to  give  the  pref- 
erence, for  this  employment,  to  metals  above  every  other 
commodity.  Metals  cannot  only  be  kept  with  as  Httle  loss 
as  any  other  commodity,  scarce  anything  being  less  per- 
ishable than  they  are ;  but  they  can  likewise,  without  any 
loss,  be  divided  into  any  number  of  parts,  as  by  fusion 
those  parts  can  easily  be  reunited  again ;  a  quality  which 
no  other  equally  durable  commodities  possess,  and  which 
more  than  any  other  quality  renders  them  fit  to  be  the 
instruments  of  commerce  and  circulation. 


28  ORIGIN  AND  USE  OF  MONEY. 

"The  man  who  wanted  to  buy  salt,  for  example,  and 
had  nothing  but  cattle  to  give  in  exchange  for  it,  must 
have  been  obliged  to  buy  salt  to  the  value  of  a  whole  ox, 
or  a  whole  sheep,  at  a  time.  He  could  seldom  buy  less 
than  this,  because  what  he  was  to  give  for  it  could  seldom 
be  divided  without  loss ;  and  if  he  had  a  mind  to  buy  more, 
he  must,  for  the  same  reasons,  have  been  obliged  to  buy 
double  or  triple  the  quantity,  the  value,  to  wit,  of  two  or 
three  oxen,  or  of  two  or  three  sheep.  If,  on  the  contrary, 
instead  of  sheep  or  oxen,  he  had  metals  to  give  in  ex- 
change for  it,  he  could  easily  proportion  the  quantity  of 
the  metal  to  the  precise  quantity  of  the  commodity  which 
he  had  immediate  occasion  for." 

Various  Metals  Used. 

Different  metals  have  been  made  use  of  by  different 
nations  for  this  purpose.  Iron  was  the  common  instru- 
ment of  commerce  among  the  ancient  Spartans ;  copper 
among  the  ancient  Romans ;  and  gold  and  silver  among 
all  rich  and  commercial  nations. 

Those  metals  seem  originally  to  have  been  made  use  of 
for  this  purpose  in  rude  bars,  without  any  stamp  or 
coinage.  Thus  we  are  told  by  Pliny,  upon  the  authority 
of  Timaeus,  an  ancient  historian,  that,  till  the  time  of 
Servius  Tullius,  the  Romans  had  no  coined  money,  but 
made  use  of  unstamped  bars  of  copper,  to  purchase  what- 
ever they  had  occasion  for.  These  rude  bars,  therefore, 
performed  at  this  time  the  function  of  money. 

The  use  of  metals  in  this  rude  state  was  attended  with 
two  very  considerable  inconveniences;  first,  with  the 
trouble  of  weighing;  and,  secondly,  with  that  of  assaying 
them.    In  the  precious  metals,  where  a  small  difference 


ORIGIN   AND   USE   OF   MONEY.  29 

in  the  quantity  makes  a  great  difference  in  the  value, 
even  the  business  of  weighing,  with  proper  exactness,  re- 
quires at  least  very  accurate  weights  and  scales.  The 
weighing  of  gold  in  particular  is  an  operation  of  some 
nicety.  In  the  coarser  metals,  indeed,  where  a  small  er- 
ror would  be  of  little  consequence,  less  accuracy  wouldy 
no  doubt,  be  necessary.  Yet  we  should  find  it  excessively 
troublesome,  if  every  time  a  poor  man  had  occasion  either 
to  buy  or  sell  a  copper's  worth  of  goods,  he  was  obliged 
to  weigh  the  copper  coin. 

The  operation  of  assaying  is  still  more  difficult,  still 
more  tedious,  and,  unless  a  part  of  the  metal  is  fairly 
melted  in  the  crucible,  with  proper  dissolvents,  any  con- 
clusion that  can  be  drawn  from  it  is  extremely  uncertain. 

Before  the  institution  of  coined  money,  however,  un- 
less they  went  through  this  tedious  and  difficult  opera- 
tion, people  must  always  have  been  liable  to  the  grossest 
frauds  and  impositions,  and  instead  of  a  poimd  weight  of 
pure  silver,  or  pure  copper,  might  receive  in  exchange  for 
their  goods  an  adulterated  composition  of  the  coarsest 
and  cheapest  materials,  which  had,  however,  in  their  out- 
ward appearance,  been  made  to  resemble  those  metals. 

Origin  of  Coinage. 

To  prevent  such  abuses,  to  facilitate  exchanges,  and 
thereby  to  encourage  all  sorts  of  industry  and  commerce, 
it  has  been  found  necessary,  in  all  countries  that  have 
made  any  considerable  advances  toward  improvement,  to 
affix  a  public  stamp  upon  certain  quantities  of  such  par- 
ticular metals  as  were  in  those  countries  commonly  made 
use  of  to  purchase  goods.     Hence  the  origin  of  coined 


30  ORIGIN  AND   USE  OF  MONEY. 

money,  and  of  those  public  offices  called  mints;  institu- 
tions exactly  of  the  same  nature  with  those  of  the  ancient 
alnagers  (inspectors)  and  stampmasters  of  woolen  and 
linen  cloth.  All  of  them  are  equally  meant  to  establish, 
by  means  of  a  public  stamp,  the  quantity  and  uniform 
goodness  of  those  different  commodities  when  brought  to 
market. 

The  First  Stamped  Metals. 

.  The  first  public  stamps  of  this  kind  that  were  affixeH 
to  the  current  metals  seem  in  many  cases  to  have  been  in- 
tended to  ascertain,  what  it  was  both  most  difficult  and 
most  important  to  ascertain,  the  goodness  or  fineness  of 
the  metal,  and  to  have  resembled  the  sterling  mark  which 
is  at  present  affixed  to  plate  and  bars  of  silver,  or  the 
Spanish  mark  which  is  sometimes  affixed  to  ingots  of 
gold,  and  which  being  struck  only  upon  one  side  of  the 
piece,  and  not  covering  the  whole  surface,  establishes  the 
fineness,  but  not  the  weight  of  the  metal.  Abraham 
weighed  to  Ephron  the  four  hundred  shekels  of  silver 
which  he  had  agreed  to  pay  for  the  field  of  Machpelah. 
They  were  said,  however,  to  be  the  current  money  of  the 
merchant,  and  yet  were  received  by  weight  and  not  by 
count,  in  the  same  manner  as  ingots  of  gold  and  bars  of 
silver  are  at  present. 

The  revenues  of  the  ancient  Saxon  kings  of  England 
are  said  to  have  been  paid,  not  in  money  but  in  kind,  that 
is,  in  victuals  and  provisions  of  all  sorts.  William  the 
Conqueror  introduced  the  custom  of  paying  them  in 
money.  This  money,  however,  was,  for  a  long  time,  re- 
ceived at  the  exchequer  by  weight  and  not  by  count. 


ORIGIN  AND  USE  OF  MONEY.  81 

Institution  of  Coins. 
The  inconvenience  and  difficulty  of  weighing  those 
metals  with  exactness  gave  occasion  to  the  institution  of 
coins,  of  which  the  stamp,  covering  entirely  both  sides  of 
the  piece  and  sometimes  the  edges,  too,  was  supposed  to 
certify  not  only  the  fineness,  but  the  weight,  of  the 
metal.  Such  coins,  therefore,  were  received  by  count,  as 
at  present,  without  the  trouble  of  weighing. 

The  denominations  of  those  coins  seem  originally  to 
have  expressed  the  weight  or  quantity  of  metal  contained 
iu  them.  In  the  time  of  Servius  Tullius,  who  first  coined 
money  at  Rome,  the  Roman  as  or  pondo  contained  a  Ro- 
man pound  of  good  copper.  It  was  divided  in  the  same 
manner  as  the  English  Troy  (from  Troyes,  France) 
pound,  into  twelve  ounces,  each  of  which  contained  a  real 
ounce  of  good  copper. 

Pounds,  Shillings,  and  Pence. 

The  English  pound  sterhng,  in  the  time  of  Edward  I, 
contained  a  pound.  Tower  weight,  of  silver  of  a  known 
fineness.  The  Tower  pound  seems  to  have  been  some- 
thing more  than  the  Roman  pound,  and  something  less 
than  the  Troy  pound.  This  last  was  not  introduced  into 
the  mint  of  England  till  the  18th  year  of  Henry  VIII. 

The  French  livre  contained  in  the  time  of  Charle- 
magne a  pound,  Troy  weight,  of  silver  of  a  known  fine- 
ness. The  fair  of  Troyes  in  Champaign  was  at  that 
time  frequented  by  all  the  nations  of  Europe,  and  the 
weights  and  measures  of  so  famous  a  market  were  gen- 
erally known  and  esteemed. 


82  ORIGIN  AND  USE  OF  MONEY. 

The  Scots  money  pound  contained,  from  the  time  of 
Alexander  the  First  to  that  of  Robert  Bruce,  a  pound  of 
silver  of  the  same  weight  and  fineness  with  the  English 
pound  sterling.  English,  French,  and  Scots  pennies  also 
contained  all  of  them  originally  a  real  pennyweight  of 
silver,  the  twentieth  part  of  an  ounce,  and  the  two  hun- 
dred and  fortieth  part  of  a  pound. 

The  shilling,  too,  seems  originally  to  have  been  the 
denomination  of  a  weight.  When  wheat  is  at  twelve 
shillings  the  quarter ,  says  an  ancient  statute  of  Henry 
III,  then  wastel  bread  of  a  farthing  shall  weigh  eleven 
shillings  and  fourpence. 

The  proportion,  however,  between  the  shilling  and 
either  the  pennj'^  on  the  one  hand,  or  the  pound  on  the 
other,  seems  not  to  have  been  so  constant  and  uniform  as 
that  between  the  penny  and  the  pound.  Among  the  an- 
cient Saxons  a  shilling  appears  at  one  time  to  have  con- 
tained only  five  pennies,  and  it  is  not  improbable  that  it 
may  have  been  as  variable  among  them  as  among  their 
neighbors,  the  ancient  Franks. 

Values  Have  Varied. 

From  the  time  of  Charlemagne  among  the  French, 
and  from  that  of  William  the  Conqueror  among  the  En- 
ghsh,  the  proportion  between  the  pound,  the  shilling, 
and  the  penny,  seems  to  have  been  uniformly  the  same  as 
at  present,  though  the  value  of  each  has  been  very  dif- 
ferent. For  in  every  country  of  the  world,  says  the  au- 
thor of  "The  Wealth  of  Nations,"  the  avarice  and  in- 
justice of  princes  and  sovereign  states,  abusing  the  confi- 
dence of  their  subjects,  have  by  degrees  diminished  the 
real  quantity  of  metal  which  had  been  originally  con- 


ORIGIN  AND  USE  OF   MONEY.  33 

tained  in  their  coins.  The  Roman  as,  in  the  latter  ages  of 
the  RepubHc,  was  reduced  to  the  twenty-fourth  part  of 
its  original  value,  and,  instead  of  weighing  a  pound, 
came  to  weigh  only  half  an  ounce.  The  English  pound 
and  penny  contain  at  present  about  a  third  only,  and  the 
French  pound  and  penny  about  a  sixty-sixth  part  of  their 
originkl  value.  By  means  of  those  operations  the  princes 
and  sovereign  states  which  performed  them  were  en- 
abled, in  appearance,  to  pay  their  debts  and  fulfill  their 
engagements  with  a  smaller  quantity  of  silver  than 
would  otherwise  have  been  requisite.  It  was  indeed  in  ap- 
pearance only ;  for  their  creditors  were  really  defrauded 
of  a  part  of  what  was  due  to  them.  All  other  debtors  in 
the  state  were  allowed  the  same  privilege,  and  might  pay 
with  the  same  nominal  sum  of  the  new  and  debased  coin 
whatever  they  had  borrowed  in  the  old.  Such  operations, 
therefore,  have  always  proved  favorable  to  the  debtor, 
and  ruinous  to  the  creditor,  and  have  sometimes  produced 
a  greater  and  more  universal  revolution  in  the  fortunes  of 
private  persons  than  could  have  been  occasioned  by  a  very 
great  public  calamity. 

The  Universal  Instrument  of  Commerce. 

It  is  in  this  manner  that  money  has  become  in  all  civil- 
ized nations  the  universal  instrument  of  commerce,  by  the 
intervention  of  which  goods  of  all  kinds  are  bought  and 
sold,  or  exchanged  for  one  another. 

The  rules  .vhich  men  naturally  observe  in  exchanging 
them  either  for  money  or  for  one  another  determine  what 
may  be  called  the  relative  or  exchangeable  value  of 
goods. 

I.B.L.  Vol.  4—3 


34)  OEIGIN   AND  USE   OF   MONEY. 

The  word  valuer  it  is  to  be  observed,  has  two  different 
meanings,  and  sometimes  expresses  the  utihty  of  some 
particular  object,  and  sometimes  the  power  of  purchas- 
ing other  goods  which  the  possession  of  that  object  con- 
veys. The  one  may  be  called  "value  in  use,"  the  other, 
"value  in  exchange."  The  things  which  have  the  great- 
est value  in  use  have  frequently  little  or  no  value  in  ex- 
change ;  and,  on  the  contrary,  those  which  have  the  great- 
est value  in  exchange  have  frequently  little  or  no  value  in 
use.  Nothing  is  more  useful  than  water ;  but,  generally 
speaking,  it  will  purchase  scarcely  anything;  scarcely 
anything  can  be  had  in  exchange  for  it.  A  diamond,  on 
the  contrary,  has  scarcely  any  value  in  use;  but  a  very 
great  quantity  of  other  goods  may  frequently  be  had  in 
exchange  for  it. 


CHAPTER  II. 

THE  FUNCTION  OF  BANKS. 

As  late  in  history  as  the  year  1746,  a  British  statesman^ 
speaking  in  the  House  of  Commons,  inquired:  "What  is 
it  that  we  call  a  Banker?  There  is  in  this  city  of  London 
a  company  or  corporation,  called  Goldsmiths,  and  most 
of  those  called  bankers  are  of  that  corporation ;  but  so  far 
as  I  know,  there  is  not  a  company  or  corporation  in  Eng- 
land called  Bankers,  nor  has  the  business  any  definition 
or  description  either  by  common  law  or  by  statute.  By 
custom  we  call  a  man  a  banker  who  has  an  open  shop, 
with  proper  counters,  servants,  and  books,  for  receiving 
other  people's  money,  in  order  to  keep  it  safe,  and  return 
it  upon  demand;  and  when  any  man  has  opened  such  a 
shop  we  call  him  a  banker,  without  inquiring  whether  any 
man  has  given  him  any  money  to  keep  or  no ;  for  this  is 
a  trade  where  no  apprenticeship  is  required,  it  having 
never  yet  been  supposed  that  a  man  who  sets  up  the  trade 
of  banking  could  be  sued  upon  the  statute  of  Queen 
Elizabeth  which  enacts,  that  none  shall  use  any  art  or 
mystery  then  used,  but  such  as  have  served  an  appren- 
ticeship in  the  same." 


In  the  present  day,  the  functions  of  banks  are  better 
understood.  A  broad  view  of  them,  from  an  interna- 
tional standpoint,  is  as  follows: 

A  banker  is  a  dealer  in  capital,  or  more  properly  a 
dealer  in  money.    He  is  an  intermediate  party  between 

35 


36  THE  FUNCTION  OF  BANES. 

the  borrower  and  the  lender.  He  borrows  of  one  party, 
and  lends  to  another;  and  the  difference  between  the 
terms  at  which  he  borrows  and  those  at  which  he  lends, 
forms  the  source  of  his  profit.  By  this  means  he  draws 
into  active  operation  those  small  sums  of  money  which 
were  previously  unproductive  in  the  hands  of  private 
individuals ;  and  at  the  same  time  furnishes  accommoda- 
tion to  those  who  have  need  of  additional  capital  to  carry 
on  their  commercial  transactions. 

Private  and  Public  Banks. 

Banks  have  been  broadly  divided  into  private  and  pub- 
lic. A  private  bank  is  that  in  which  there  are  but  few 
partners,  and  these  attend  personally  to  its  management. 
A  public  bank  is  that  in  which  there  are  numerous  part- 
ners or  shareholders,  and  they  elect  from  their  own  body 
a  certain  number,  who  are  intrusted  with  its  management. 

The  business  of  banking  consists  chiefly  in  receiving 
deposits  of  money,  upon  which  interest  may  or  may  not 
be  allowed ;  in  making  advances  of  money,  principally  in 
the  way  of  discounting  bills;  and  in  affecting  the  trans- 
mission of  money  from  one  place  to  another.  Banks  in 
metropolitan  cities  are  usually  the  agents  of  the  banks  in 
smaller  communities  and  charge  a  commission  on  their 
transactions. 

The  disposable  means  of  a  bank  consist  of — First,  the 
capital  paid  in  by  the  partners,  or  shareholders.  Second, 
the  amount  of  money  deposited  by  their  customers. 
Third,  the  amount  of  notes  they  are  able  to  keep  out  in 
circulation.  Fourth,  the  amount  of  money  in  the  course 
of  transmission — that  is,  money  they  have  received,  and 
are  to  repay,  in  some  distant  place,  at  a  future  time. 


THE  FUNCTION  OF  BANKS.  37 

These  disposable  means  are  employed — First,  in  dis- 
counting bills.  Second,  in  advances  of  money  in  the 
form  of  cash  credits,  loans,  or  overdrawn  accounts. 
Third,  in  the  purchase  of  government  or  other  securities. 
Fourth,  a  part  is  kept  in  the  banker's  till,  to  meet  the  cur- 
rent demands.  Of  these  four  ways  of  employing  the  cap- 
ital of  a  bank,  three  are  productive,  and  one  is  unproduc- 
tive. The  discounting  of  bills  yields  interest ;  the  loans, 
and  the  cash  credits,  and  the  overdrawn  accounts,  yield 
interest;  the  government  securities  yield  interest;  the 
money  in  the  till  yields  no  interest.  , 

The  expenses  of  a  hank  may  be  classified  thus:  Rent, 
taxes,  and  repairs  of  the  building  or  premises  in  which  the 
business  is  carried  on ;  salaries  of  the  officers ;  stationers' 
bills  for  books,  paper,  notes,  stamps,  etc.;  incidental  ex- 
penses, as  postage,  light,  heat,  etc. 

The  profits  of  a  hank  are  that  portion  of  its  total  re- 
ceipts— including  discount,  interest,  dividends,  and  com- 
mission— which  exceeds  the  amount  of  the  expenses. 

Banks  as  Commercial  Institutions. 
In  commercial  language  a  bank  is  a  repository,  or  an 
establishment,  for  the  purpose  of  receiving  the  money  of 
individuals ;  either  to  keep  it  in  security,  or  to  improve  it 
by  trafficking  in  goods,  bullion,  or  bills  of  exchange ;  and, 
as  stated  above,  it  may  be  either  of  a  public  or  of  a  pri- 
vate nature.  A  public  bank  is  generally  regulated  by 
certain  laws,  enacted  by  the  government  of  the  nation  or 
state,  which  constitute  its  charter,  Hmit  its  capital,  and  es- 
tablish the  rules  by  which  it  is  to  conduct  business.  A  pri- 
vate bank,  on  the  other  hand,  is  merely  a  contract  among 
individuals,  for  carrying  on  a  trade  in  money  and  bills ; 


38  THE  FUNCTION  OF  BANKS. 

and  the  responsibility  of  the  partners  is  usually  the  only 
security  of  those  who  transact  business  with  it. 

Banks  then  are  properly  commercial  institutions  which 
by  affording  credits,  or  issuing  notes,  as  the  representa- 
tive of  money,  enable  merchants,  with  greater  facility,  to 
buy  and  sell  commodities,  at  home  or  abroad.  The  pro- 
duce of  one  country  is  thus  exchanged  with  that  of  an- 
other, by  means  of  a. medium  to  which  an  ideal  value  is 
attached;  hence  the  great  utility  of  banking  establish- 
ments in  all  commercial  countries. 

Classification  of  Banks. 
Private  banking  is  the  oldest  form  of  the  banking 
business  and,  as  is  well  known,  the  antiquity  of  banks  is 
very  great.  Records  exist  of  ^  banking  transactions 
among  the  Assyrians  and  in  the  Metropolitan  Museum 
in  New  York  there  are  Babylonian  tablets  bearing  dis- 
tinct records  of  transactions  in  banking  that  took  place  in 
the  reign  of  Nebuchadnezzar. 

Public  or  Incorporated  Banks. 

Public  or  incorporated  banks  may  be  broadly  classi- 
fied as  national  and  state  banks.  National  banks  exist 
by  virtue  of  national  laws.  State  banks  are  governed  by 
the  acts  of  state  legislatures. 

State  banks  may  be  further  divided  into  banks  of  dis- 
count and  deposit,  savings  banks,  and  trust  companies. 
It  may  also  be  noted  that  state  banks  may  exist  (a)  by 
virtue  of  special  acts  or  charters,  or,  (b)  by  virtue  of 
general  laws  under  which  all  such  banks  acquire  the  same 
rights  and  liabilities. 

The  establishment  of  state  banks  under  special  legis- 
lative charters  was  the  original  method  employed,  but 


THE  FUNCTION  OF  BANKS.  39 

the  disadvantages  of  the  charter  system  are  obvious.  The 
charters  w.ere  costly  to  the  promoters,  they  could  be 
granted  only  when  the  legislature  was  in  session,  and 
they  opened  the  door  to  corruption  on  the  one  hand  and 
to  the  granting  of  special  privileges  on  the  other. 

The  enactment  of  general  laws  to  govern  the  estab- 
lishment of  banking  institutions  was  made  necessary  by 
the  evils  attending  the  special  charter  system.  Every 
state  now  has  a  general  banking  law,  providing  an  in- 
expensive and  ready  means  of  obtaining  authority  to 
establish  a  bank  under  state  regulations.  Charters,  how- 
ever, are  still  granted  by  some  state  legislatures,  and 
there  are  a  number  of  state  banks  still  running  under  old 
charters. 

National  Banks. 

National  banks  of  the  United  States  are  established 
under  the  National  Banking  Act  and  are  subject  to  fed- 
eral regulation.  [See  Chapter  XIII.]  National  banks  in 
other  countries  have  certain  relations  with  their  respec- 
tive governments,  and  a  bank  of  this  character  has  beeu 
twice  established  in  the  history  of  the  United  States.  In 
each  case,  the  national  government  founded  and  con- 
ducted such  a  bank  with  branches.  This  bank,  with  its 
two  periods  of  existence,  was  known  as  the  Bank  of  the 
United  States.  The  idea  of  it  was  conceived  immedi- 
ately after  the  adoption  of  the  Constitution,  by  Alexan- 
der Hamilton,  then  Secretary  of  the  Treasury,  and  the 
act  of  Congress  incorporating  the  first  bank  became  law 
on  February  25,  1791.  The  duration  of  the  bank  was 
limited  to  the  4th  of  March,  1811. 

The  second  Bank  of  the   United   States,   located  at 


40  THE  FUNCTION  OF  BANKS. 

Philadelphia  with  branches  in  the  several  states,  was  cre- 
ated by  an  Act  of  Congress  March  3, 1816,  and  was  con- 
ducted until  1836,  when  a  renewal  of  its  charter  was  de- 
nied. In  consequence  of  this,  reorganization  was  ef- 
fected by  means  of  authority  'of  the  legislature  of  the 
State  of  Pennsylvania.  The  bank  assigned  in  1841,  its 
affairs  being  finally  liquidated  in  1856  and  resulting  in 
the  payment  in  full  of  interest  and  principal  of  liabihties 
to  depositors  and  note  holders;  the  shareholders,  how- 
ever, received  nothing  on  their  investment  in  stock  of  the 
bank. 

During  President  Tyler's  administration,  efforts  were 
made  to  establish  another  national  bank  to  be  conducted 
by  the  United  States  government,  but  the  president  ve- 
toed the  bill  and  no  similar  bank  was  ever  re-estabhshed. 

The  first  bank  in  the  United  States  was  the  Bank  of 
North  America,  elsewhere  referred  to,  by  which  exclu- 
sive privileges  of  a  monopolistic  character  were  sought, 
and  these  were  soon  proven  to  be  inconsistent  with  the 
general  character  of  an  American  institution.  It  was 
opened  for  business  on  January  1,  1782. 

[See  Chapter  XVI— "The  Federal  Reserve  Sys- 
tem."] 

Banks  of  Discaunt  and  Deposit. 

A  bank  of  discount  is  owned  by  the  shareholders  who 
contribute  the  capital.  It  receives  commercial  and  other 
deposits,  usually  payable  on  demand.  It  discounts  com- 
mercial paper,  makes  short  loans  for  conmiercial 
purposes,  and  is  managed  by  a  board  of  directors  chosen 
by  the  shareholders,  who  hold  annual  meetings  to  receive 
reports  and  elect  directors. 


THE  FUNCTION  OF  BANKS.  41 

Savings  Banks. 
Savings  banks  are  organized  by  trustees  and  operate 
usually  without  a  capital  stock,  having  no  shareholders. 
The  deposits  are  received  chiefly  in  small  sums,  and  are 
payable  only  after  notification  by  the  depositors  that 
they  wish  to  withdraw  part  or  all  of  their  money.  In  the 
case  of  small  withdrawals,  the  notification  is  usually 
waived,  except  in  periods  of  financial  stringency  or  de- 
pression. Loans  of  the  deposit  funds  are  made  for 
longer  periods  as  a  rule  than  in  the  case  of  banks  of  dis- 
count, and  are  made  to  investors,  for  building  purposes, 
etc.  The  trustees  elect  some  of  their  number  as  directors 
and  these  directors  manage  the  business.  If  a  trustee  re- 
signs or  dies,  a  successor  is  elected  by  the  other  trustees. 
The  depositors  have  no  voice  in  the  election  of  ofiicers  or 
in  the  management  of  the  business. 

Trust  Companies. 

Trust  companies  are  a  modern  development  of  the 
banking  business.  They  combine  many  of  the  functions 
of  the  older  banks  of  discount  with  the  execution  of 
trusts.  Deposits  are  received  by  them  and  interest  paid. 
The  making  of  loans  forms  an  important  part  of  the 
business.  The  funds  are  lent  in  all  cases  on  collateral 
security,  stocks,  bonds,  etc.,  and  not,  as  in  the  case  of 
commercial  banks,  on  the  credit  of  business  men  and 
firms. 

Trust  companies  act  as  administrators  and  executors 
of  estates,  guardians  to  minors,  trustees  for  beneficiaries 
of  wills,  etc.  They  are  often  called  upon  also  to  act  as 
trustees  of  bondholders  in  large  operations,  such  as  the 
building  or  reorganizing  of  railroads. 


42  THE  FUNCTION  OF  BANKS. 

One  of  their  principal  functions  is  the  management  of 
real  estate,  especially  where  the  ownership  is  vested  in  es- 
tates of  deceased  individuals  or  in  corporations.  They 
act  as  fiduciary  agents  in  business  operations  of  a  greatly 
varied  character,  and  in  recent  years  have  largely  re- 
placed individual  trustees  in  the  management  of  estates, 
etc.,  for  the  very  good  reasons  that  they  possess  capital, 
responsibility,  experience,  disinterestedness  and  conser- 
vatism, and  besides  have  fixed  charges  of  a  reasonable 
character  for  the  services  they  render.  They  have  proved 
a  valuable  addition  to  the  modern  machinery  of  business. 


CHAPTER  III. 

THE  ORIGIN  OF  BANKING. 

There  is  but  little  information  available  as  to  the  kind 
of  banks  that  existed  in  the  earlier  ages,  or  on  what  sys- 
tem they  conducted  their  business.  As  most  of  the  na- 
tions of  antiquity  subsisted  chiefly  on  agriculture,  they 
probably  had  little  occasion  for  banks;  for  it  is  only  in 
commercial  countries  that  these  institutions  have  at- 
tained to  any  high  degree  of  prosperity.  And  as  even  the 
commercial  nations  of  antiquity  were  unacquainted  with 
joint-stock  companies  or  conmiercial  corporations,  and 
had  not  discovered  the  use  of  paper-money  or  bills  of  ex- 
change, the  business  of  a  banker,  even  among  them,  must 
have  been  somewhat  different  from  that  of  a  banker  of 
the  present  day. 

The  merchants  of  those  early  times  employed  as 
money,  gold  and  silver  bullion ;  and  received  it  and  paid 
it  away  by  weight.  It  is  probable  that  the  merchants 
would  require  that  the  precious  metals  they  received 
should  be  of  a  certain  degree  of  fineness.  Thus  when  we 
read  of  a  father  in  Israel  weighing  out  as  a  payment  400 
shekels  of  silver,  current  money  with  the  merchant  ( Gen- 
esis XXIII,  16) — the  phrase  implies  that  the  money 
current  with  the  merchant  was  different  from  that  in  or- 
dinary use. 

Afler  bullion  was  superseded  by  coin,  and  each  nation 
had  a  coin  of  its  owti,  the  merchants  would  necessarily  in 

43 


44  THE  OEIGIN  OF  BANKING. 

the  course  of  their  business  receive  coins  belonging  to  dif- 
ferent nations,  and  hence  would  be  applied  to  by  stran- 
gers who  wished  to  exchange  their  own  money  for  the 
money  of  the  country  in  which  they  sojourned.  This 
would  take  place  more  particularly  in  those  oriental 
countries  whose  inhabitants  were  accusk)med  in  certain 
seasons  to  meet  together  for  the  celebration  of  public 
festivals. 

The  Jewish  Money-Ohangers. 

We  read  in  the  New  Testament  of  money-changers 
who  had  tables  in  the  temple  of  Jerusalem.  It  is  prob- 
able they  attended  for  the  purpose  of  giving  Jewish 
money  in  exchange  for  those  various  coins  which  per- 
sons coming  from  the  neighboring  countries  might  have 
brought  with  them. 

Whether  the  business  of  money-changing  was  carried 
on  as  a  separate  employment,  or  united  with  the  general 
business  of  a  merchant,  we  are  not  informed;  but  it  is 
stated  that  the  exchangers  allowed  interest  for  money 
lodged  in  their  hands.  "Thou  wicked  and  slothful  serv- 
ant, thou  oughtest  to  have  put  my  money  to  the  ex- 
changers, and  then  at  my  coming  I  should  have  received 
mine  own  with  usury."  (Matthew  XXV,  27.)  From 
the  circumstance  of  their  allowing  interest  on  money,  we 
may  infer  that  they  also  lent  money  on  interest;  other- 
wise they  would  have  had  no  use  for  the  money  they  bor- 
rowed. This  scanty  information  forms  the  whole  of  our 
knowledge  respecting  the  mode  of  banking  practised  by 
the  ancient  Babylonian,  Egyptian  and  Jewish  nations. 


THE  ORIGIN  OF  BANKING.  ~^  45 

The  Banks  of  Ancient  Greece. 
With  respect  to  the  bankers  of  Greece  we  have  more 
ample  details,    some  of  these  being  interestingly  re- 
counted by  J.  W.  Gilbart,  F.  R.  S.,  in  his  "History, 
Principles  and  Practice  of  Banking." 

In  Greece  the  first  banks  were  the  temples.  We  read 
that  "the  wealth  and  growing  estimation  of  Delphi  had 
also  another  source,  of  which  information  remains  only 
so  far  as  to  assure  us  of  the  fact  with  far  less  explanation 
of  circumstances  than  for  its  importance  might  be  de- 
sired. In  the  general  insecurity  of  property  in  the  early 
ages,  and  especially  in  Greece,  it  was  highly  desirable  to 
convert  all  that  could  be  spared  from  immediate  use  into 
that  which  might  more  easily  be  removed  from  approach- 
ing danger.  With  this  view,  by  a  compact  understood 
among  men,  the  precious  metals  appear  to  have  obtained 
their  early  estimation.  Gold,  then,  and  silver,  having  ac- 
quired their  certain  value  as  signs  of  wealth,  a  deposit 
secure  against  the  dangers  continually  threatening,  not 
individuals  only,  but  every  town  and  state  in  Greece, 
would  be  a  great  object  of  the  wealthy.  Such  security 
offered  nowhere  in  equal  amount  as  in  those  temples, 
which  belong  not  to  any  single  state,  but  were  respected 
by  the  common  religion  of  the  nation.  The  priesthood, 
not  likely  to  refuse  the  charge,  would  have  a  large  inter- 
est in  acquiring  the  reputation  of  fidelity  to  it.  Thus 
Delphi  appears  to  have  become  the  great  bank  of  Greece, 
perhaps  before  Homer,  in  whose  time  its  riches  seem  to 
have  been  already  proverbial.  Such  then  was  found  the 
value  of  this  institution,  that  when  the  Dorian  conquerors 
drove  so  large  a  part  of  the  Greek  nation  into  exile,  the 


46  THE  ORIGIN  OF  BANKING. 

fugitives  who  acquired  new  settlements  in  Asia  estab- 
lished there  their  own  national  bank  in  the  manner  of  th^t 
of  their  former  country,  recommending  it  to  the  protec- 
tion of  the  same  divinity.  The  Temple  of  Apollo,  at 
Branchidse,  became  the  great  depository  of  the  wealth 
of  Ionia."    (Mitford's  History  of  Greece.) 

Afterward  the  temple  of  Olympia,  like  that  of  Delphi, 
became  an  advantageous  repository  for  treasure.  But 
although  the  temples  discharged  one  of  the  offices  of 
banks,  by  being  places  of  security,  yet  as  they  did  not 
grant  interest  on  the  money  deposited,  they  did  not  su- 
persede banks  of  deposit  established  by  private  individ- 
uals. At  Athens,  especially,  banking  was  a  flourishing 
trade,  which  is  thus  described  by  the  Abbe  Barthelemy  in 
"Travels  of  Anacharsis  in  Greece": 

Methods  of  Athenian  Bankers. 

"The  greater  part  of  the  Athenians  employ  their 
money  in  trade,  but  they  are  not  permitted  to  lend  it  for 
any  place  but  Athens.  They  receive  an  interest  for  the 
use  of  it  which  is  not  fixed  by  the  laws,  but  stipulated  in 
a  contract,  deposited  either  in  the  hands  of  a  banker  or 
some  friend  to  both  parties.  If,  for  instance,  a  voyage  is 
tt)  be  made  to  the  Cymmerian  Bosphorus,  the  instrument 
specifies  the  time  of  the  departure  of  the  vessel,  the  kind 
of  commodities  with  which  she  is  to  be  freighted,  the  sale 
which  is  to  be  made  of  them  in  the  Bosphorus,  and  the 
merchandise  which  she  is  to  bring  back  to  Athens;  and 
as  the  duration  of  the  voyage  is  uncertain,  some  agree 
that  their  money  shall  not  be  payable  till  the  return  of  the 
vessel,  while  others,  more  timid,  and  contented  with  a 


THE  ORIGIN  OF  BANKING.  47 

less  profit,  require  that  it  shall  be  repaid  at  the  Bosphorus 
immediately  after  the  sale  of  the  goods  carried  out;  in 
which  case  they  either  themselves  repair  to  the  place 
where  they  are  to  receive  it,  or  send  thither  some  person 
in  whom  they  can  confide,  and  whom  they  empower  to  act 
for  them. 

"The  lender  has  his  security,  either  on  the  merchandise 
or  the  goods  of  the  borrower;  but  as  the  dangers  of  the 
sea  are  in  part  risked  by  the  former,  and  the  profit  of  the 
latter  may  be  very  considerable,  the  interest  of  money 
thus  lent  may  rise  as  high  as  thirty  per  cent,  more  or  less, 
according  to  the  length  and  hazards  of  the  voyage. 

"The  usury  here  spoken  of  is  known  by  the  name  of 
maritime;  that  called  landed  usury  is  more  oppressive, 
and  no  less  variable. 

"Those  who,  without  risking  the  dangers  of  the  sea, 
wish  to  derive  profit  from  their  money,  lend  it  to  bankers 
at  the  rate  of  twelve  per  cent  per  annum,  or  rather  one 
per  cent  for  every  new  moon.  But  as  the  laws  of  Solon 
do  not  prohibit  those  who  have  money  from  demanding 
the  most  extravagant  interest  for  it,  some  persons  receive 
more  than  sixteen  per  cent,  and  others,  especially  among 
the  lower  classes  of  people,  exact  every  day  the  quarter 
of  the  principal.  These  extortions  are  not  concealed,  and 
cannot  be  punished,  except  by  the  public  opinion,  which 
condemns,  but  does  not  sufficiently  despise  those  who  are 
guilty  of  them. 

Commerce  Gave  Rise  to  Bankers. 
"Commerce  increases  the  circulation  of  wealth,  and  this 
circulation  has  given  birth  to  the  occupation  of  bankers, 
which  facilitates  it  still  more.    A  person  who  is  about  to 


48  THE  ORIGIN  OF  BANKING. 

make  a  voyage,  or  who  fears  to  keep  by  him  too  great  a 
sum  of  money,  lodges  it  in  the  hands  of  these  bankers, 
sometimes  only  as  a  trust,  and  without  requiring  any  in- 
terest, and  sometimes  on  condition  of  sharing  with  them 
the  profit  it  shall  produce.  They  advance  money  to  gen- 
erals who  go  to  take  on  them  the  command  of  armies,  or 
other  individuals  who  stand  in  need  of  their  assistance. 

"In  the  greater  part  of  bargains  made  by  them,  no 
witness  is  required;  they  content  themselves  with  enter- 
ing in  a  register  that  such  a  person  has  deposited  in  their 
hands  such  a  sum,  which  they  must  repay  to  such  an- 
other, if  the  former  should  happen  to  die.  It  would 
sometimes  be  very  difficult  to  prove  that  they  have  re- 
ceived a  sum  of  money,  were  they  to  deny  it ;  but  if  they 
should  expose  themselves  to  such  a  charge  more  than 
once,  they  would  lose  the  confidence  of  the  public,  on 
which  depends  their  success  in  the  business  in  which  they 
are  engaged. 

"By  employing  the  money  deposited  in  their  hands, 
and  lending  it  at  a  greater  interest  than  they  are  to  pay 
for  it,  they  amass  riches  which  gain  them  friends,  whose 
protection  they  purchase  by  assiduous  services.  But  all 
is  lost  when,  unable  to  call  in  their  money,  they  are  in- 
capable of  fulfilling  their  engagements.  They  are  then 
obliged  to  conceal  themselves,  and  can  only  escape  the 
severity  of  justice  by  surrendering  all  their  remaining 
property  to  their  creditors. 

"Those  who  wish  to  exchange  foreign  moneys  apply 
to  the  bankers,  who  by  different  means,  as  the  touchstone 
and  the  balance,  examine  whether  they  are  not  adulter- 
ated or  deficient  in  weight." 


THE  ORIGIN  OF  BANKING.  49 

The  Tirst  Joint-Stock  Bank. 

In  a  treatise  published  by  Xenophon,  upon  the  Athen- 
ian revenue,  we  meet  with  the  first  suggestion  for  the  es- 
tabhshment  of  a  joint-stock  bank.  Of  this  historic  step 
Mitford  says: 

"A  very  remarkable  project,  which  seems  to  have  been 
original  with  Xenophon,  next  occurs — the  establishment 
of  a  bank  by  subscription,  open  to  all  the  Athenian  peo- 
ple. The  interest  of  money,  it  appears,  was  enormous 
at  Athens,  an  unavoidable  consequence  of  the  wretched 
insecurity  of  person  and  property.  Throughout  modern 
Europe,  land  is,  of  all  property,  esteemed  the  safest 
source  of  income ;  but  in  Greece  it  was  held  that  the 
surest  return  was  from  money  lent  at  interest.  For  in  the 
multiphed  division  of  Greece  into  small  republics  with 
very  narrow  territories,  the  produce  of  land  was  continu- 
ally liable  to  be  carried  off  or  destroyed  by  an  invading 
enemy,  but  a  moneyed  fortune,  according  to  Xenophon's 
observation,  was  safe  within  the  city  walls.  In  propor- 
tion, then,  to  the  interest  of  money,  and  the  insecurity  of 
aU  things,  the  profits  of  trade  will  always  be  high,  and 
thus  numbers  would  be  induced  to  borrow,  even  at  a  high 
interest.  Xenophon  therefore  proposed,  by  lending 
from  the  public  stock,  and  encouraging  commercial  ad- 
venture by  just  regulations,  to  raise  a  great  revenue,  and, 
by  the  same  means,  instead  of  oppressing  to  enrich  indi- 
viduals. As  corollary,  then,  to  his  project,  when  the 
amount  of  the  subscription  or  its  profits  might  allow,  he 
proposed  to  improve  the  ports  of  Athens,  to  form 
wharves  and  docks,  to  erect  halls,  exchanges,  warehouses, 
market-houses,  and  inns,  for  all  which  tolls  and  rents 

I.B.Iv.  Vol.  4 — ♦ 


50  THE  OEIGIN  OF  BANKING. 

should  be  paid ;  and  to  build  ships  to  be  let  to  merchants. 
Thus,  while  numbers  of  individuals  were  encouraged  and 
enabled  to  employ  themselves  for  their  private  benefits, 
the  whole  Athenian  people  would  become  one  great  bank- 
ing company,  from  whose  profits  every  member,  it  was 
expected,  would  derive  at  least  an  easy  livelihood." 

The  Banks  of  Ancient  Rome. 

At  Rome,  the  bankers  were  called  Argentarii,  Men- 
sarii,  Numularii,  or  Collybistce.  The  banking-houses  or 
banks  were  called  Tahernce  Argentarice,  or  Mensce 
Numularice,  Some  of  these  bankers  were  appointed  by 
the  government  to  receive  the  taxes,  others  carried  on 
business  on  their  own  account.  Their  mode  of  transact- 
ing business  was  somewhat  similar  to  that  which  is  in  use 
in  modern  times. 

Into  these  houses  the  State,  or  men  of  wealth,  caused 
their  revenues  to  be  paid,  and  they  settled  their  accounts 
with  their  creditors  by  giving  a  draft  or  check  on  the 
bank.  If  the  creditor  also  had  an  account  at  the  same 
bank,  the  account  was  settled  by  an  order  to  make  the 
transfer  of  so  much  money  from  one  name  to  another. 
To  assign  over  money  or  to  pay  money  by  a  draft,  was 
called  prcescribere,  and  rescribere;  the  assignment  or 
draft  was  called  attributio. 

These  bankers,  too,  were  money-changers.  They  also 
lent  money  on  interest,  and  allowed  a  lower  rate  of  in- 
terest on  money  deposited  in  their  hands. 

In  a  country  where  commerce  was  looked  upon  with 
contempt,  banking  could  not  be  deemed  very  respectable. 
Among  most  of  the  ancient  agricultural  nations  there 
was  a  prejudice  against  the  taking  of  interest  for  the 


THE  OEIGIN  OF  BANKING.  51 

loan  of  money.  Hence  the  private  bankers  at  Rome  were 
sometimes  held  in  disrepute,  though  those  whom  the  gov- 
ernment had  established  as  pubhc  cashiers,  or  receivers- 
general,  as  we  may  term  them,  held  so  exalted  a  rank  that 
some  of  them  became  consuls. 

The  Romans  had  also  loan  banks,  from  which  the  poor 
citizens  received  loans  without  paying  interest.  We  are 
told  that  the  confiscated  property  of  criminals  was  con- 
verted into  a  fund  by  Augustus  Caesar,  and  that  from 
this  fund  sums  of  money  were  lent  without  interest  to 
those  citizens  who  could  pledge  value  to  double  the 
amount.  The  same  system  was  pursued  by  Tiberius. 
He  advanced  a  large  capital,  which  was  lent  for  a  term 
of  two  or  three  years  to  those  who  could  give  landed 
security  to  double  the  value  of  the  loan.  Alexander  Se- 
verus  reduced  the  market-rate  of  interest  by  lending  sums 
of  money  at  a  low  rate,  and  by  advancing  money  to  poor 
citizens  to  purchase  lands,  and  agreeing  to  receive  pay- 
ment from  the  produce. 

Origin  of  the  Word  ''Bank.'* 

After  commerce  and  the  arts  had  revived  in  Italy,  the 
business  of  banking  was  resumed.  The  word  "bank"  is 
commonly  regarded  as  derived  from  the  Italian  word 
banco,  a  bench — the  Jews  in  Lombardy  having  benches 
in  the  market-place  for  the  exchange  of  money  and  bills. 
When  a  banker  failed,  his  bench  was  broken  by  the  pop- 
ulace; and  from  this  circumstance  we  have  our  word 
bankrupt. 

But  while  this  is  the  derivation  generally  accepted, 
some  writers  have  asserted  that  a  more  accurate  explana- 
tion of  the  use  of  the  word  "bank"  is  that  which  makes  it 


52  THE  ORIGIN  OF  BANKING. 

synonjrmous  with  the  Italian  monte  (Latin  mons,  mon- 
tis) ,  a  mound,  heap,  or  bank.  Thus  the  Italian  Monte 
di  Pieta  and  the  French  Mont  de  Piete  signify  "a  Char- 
ity Bank."  Bacon  and  Evelyn  use  the  word  in  the  same 
sense.  Bacon  says :  "Let  it  be  no  hank  or  common  stock, 
but  every  man  be  master  of  his  own  money."  Evelyn,  re- 
ferring to  the  Monte  di  Pieta  at  Padua,  writes :  "There  is 
a  continual  bank  of  money  to  assist  the  poor."  Black- 
stone  also  says:  "At  Florence,  in  1344,  government  owed 
£60,000,  and  being  unable  to  pay  it,  formed  the  princi- 
pal into  an  aggregate  sum  called,  metaphorically  a 
Mount  or  Bank" 

The  Florentine  Bankers. 

Though  the  States  of  Venice  and  Genoa  made  the 
most  rapid  advances  in  commerce,  and  established  pubHc 
banks,  yet  the  department  of  banking  appears  to  have 
fallen  more  particularly  into  the  hands  of  the  Floren- 
tines. 

"As  the  Florentines  did  not  (like  the  Venetians  and 
the  Genoese)  possess  any  commodious  seaport,  their  ac- 
tive exertions  were  directed  chiefly  towards  the  improve- 
ment of  their  manufactures  and  domestic  industry. 
About  the  beginning  of  the  fourteenth  century,  the 
Florentine  manufacturers  of  various  kinds,  particularly 
those  of  silk  and  woolen  cloth,  appear,  from  the  enumer- 
ation of  a  well-informed  historian,  to  have  been  very  con- 
siderable. The  connections  which  they  formed  in  dif- 
ferent parts  of  Europe,  by  furnishing  them  with  the 
productions  of  their  own  industry,  led  them  to  engage  in 
another  branch  of  trade,  that  of  banking.  In  this  they 
soon  became  so  eminent,  that  the  money  transactions  of 


THE  OEIGIN  OF  BANKING.  53 

almost  every  kingdom  in  Europe  passed  through  their 
hands,  and  in  many  of  them  they  were  entrusted  with  the 
collection  and  administration  of  the  public  revenues.  In 
consequence  of  the  activity  and  success  with  which  they 
conducted  their  manufactures  and  money  transactions — 
the  former  always  attended  with  certain  though  mode- 
rate profit,  the  latter  lucrative  in  a  high  degree,  at  a  pe- 
riod when  neither  the  interest  of  money  nor  the  premium 
on  bills  of  exchange  was  settled  with  accuracy — Flor- 
ence became  one  of  the  first  cities  in  Christendom,  and 
some  of  its  citizens  extremely  opulent."  (Robertson's 
"Disquisition  on  India.") 

Cosmo  di  Medici  of  Florence  was  reckoned  in  his  day 
the  most  wealthy  merchant  ever  known  in  Europe,  and 
in  a  treaty  whereby  Louis  XI  engaged  to  pay  Edward 
IV  fifty  thousand  crowns  annually,  it  was  expressly 
stipulated  that  the  king  of  France  should  engage  the 
partners  of  the  Bank  of  Medici  to  become  bound  for  the 
faithful  and  regular  performance  of  this  agreement  on 
the  part  of  himself  and  his  heirs. 

The  Earliest  National  Banks. 
Although  the  business  of  banking  has  probably  always 
been  carried  on  by  private  individuals  before  it  has  been 
carried  on  by  a  public  company,  yet  most  countries  have 
found  it  useful  to  establish  a  public  or  national  bank. 
Some  of  these  banks  have  been  founded  for  the  purpose 
of  facihtating  commerce,  others  to  serve  the  govern- 
ment.   The  most  ancient  of  these  was  founded  at  Venice. 

The  Bank  of  Venice. 
The  first  establishment  of  banking,  in  a  regular  and 
systematic  form,  took  place  at  Veriice  about  the  middle  of 


54  THE  ORIGIN  OF  BANKING. 

the  twelfth  century  (1157) ;  and  it  arose  from  the  neces- 
sities of  the  state.  Duke  Vitale,  Mitchel  II,  being  in- 
volved in  expensive  wars  with  the  Empire  of  the  West, 
and  the  Grecian  Manuel,  embarrassed  the  finances  of  the 
republic ;  and  to  relieve  it  from  the  pressure  of  its  difficul- 
ties, he  had  recourse  to  a  forced  loan,  the  contributors  to 
which  were  made  creditors,  and  received  interest  at  the 
rate  of  four  per  cent  per  annum.  The  "Chamber  of 
Loans"  was  established  for  the  management  of  this  fund, 
and  regular  payment  of  the  interest;  which,  gradually 
improving  its  plan,  at  last  formed  itself  into  the  more 
perfect  institution  of  the  Bank  of  Venice. 

This  celebrated  bank  served  as  a  model  to  almost  ev- 
ery similar  establishment  in  succeeding  ages;  its  capital 
was  5,000,000  ducats,  or  $4,800,000,  for  which  the  repub- 
lic was  security.  It  was,  properly,  a  board  of  deposit, 
credit  and  interest.  By  an  edict  of  the  state,  all  payments 
of  wholesale  merchandise,  and  bills  of  exchange,  were  re- 
quired to  be  made  in  banco,  or  bank  notes ;  and  all  debt- 
ors were  obliged  to  lodge  their  money  in  the  bank,  that 
their  creditors  might  receive  payment  in  banco;  which 
was  done  by  transferring  the  amount  from  the  one  to 
that  of  the  other,  or  by  writing  off  the  sum  from  the  ac- 
count of  the  debtor,  and  placing  it  to  that  of  the  creditor. 
Payments  were  made  in  this  manner  without  the  inter- 
vention of  gold  or  silver;  but  there  were  exceptions  to 
this  rule  in  cases  of  retail  trade,  or  when  foreigners 
wished  to  carry  off  the  precious  metals. 

All  the  riches  of  the  state  thus  flowed  into  the  bank; 
and,  through  various  channels,  were  again  diffused 
among  traders,  to  give  activity  to  the  extensive  commerce 
of  this  once  opulent  and  powerful  city. 


THE  ORIGIN  OF  BANKING.  55 

From  its  good  faith,  and  the  regularity  of  its  trans- 
actions, the  Bank  of  Venice  always  maintained  a  high 
character  in  Europe,  and  on  some  occasions,  its  obliga- 
tions were  more  esteemed  than  the  bonds  of  kings.  This 
bank  may  well  be  deemed  a  wonder  for  the  twelfth  cen- 
tury, but  required  much  alteration  in  methods  to  adapt  it 
to  the  requirements  of  the  nineteenth  and  twentieth  cen- 
turies. 

During  two  centuries  and  a  half  the  Bank  of  Venice 
was  unrivaled.  The  progress  of  human  knowledge  was 
slow  and  improvements  in  banking  methods  were  long  in 
coming. 

The  Bank  of  Barcelona. 

So  early  as  the  year  1349  the  business  of  banking  was 
carried  on  after  a  fashion  by  the  drapers  of  Barcelona, 
who  were  probably  the  most  wealthy  class  of  merchants 
in  that  city.  But  by  an  ordinance  of  the  king  of  Arra- 
gon,  they  were  not  allowed  to  commence  this  branch  of 
trade  until  they  had  first  given  sufficient  security.  In 
the  year  1401  a  public  bank  was  established  by  the  mag- 
istrates. It  was  called  the  Table  of  Exchange,  and  was 
properly  a  bank  of  exchange  and  deposit.  Foreign  bills 
were  negotiated  with  the  same  liberaHty  as  those  of  the 
citizens,  and  accommodations  were  extended  to  strangers 
as  well  as  to  natives.  It  was  altogether  calculated  for 
the  encouragement  of  both  external  and  internal  com- 
merce, and  the  funds  of  the  city  were  pledged  as  security 
for  the  responsibility  of  the  bank. 

The  Bank  of  Genoa. 
In  the  year  1407,  the  bank  of  Genoa  commenced,  ow- 
ing its  origin  to  the  debts  of  the  state.    Previous  to  this 


56  THE  ORIGIN  or  BANKING. 

time,  the  republic  borrowed  large  sums  of  money  from 
the  citizens,  assigning  certain  branches  of  the  revenue 
for  the  payment  of  the  interest,  and  accounting  to  gov- 
ernment for  the  funds  intrusted  to  its  care.  From  this 
circumstance,  the  Genoese  claim  the  merit  of  estabhshing 
a  bank  as  early  as  the  Venetians;  but  it  is  evident  that  the 
transactions  of  this  board  were  only  an  approximation  to 
banking.  In  process  of  time,  however,  the  multiplicity 
and  extent  of  these  funds  induced  disorder  and  confu- 
sion, and  it  was  deemed  expedient  to  consolidate  the 
whole  into  one  capital  stock,  to  be  managed  by  a  bank 
called  the  Chamber  of  St.  George,  to  be  governed  by 
eight  protectors,  annually  chosen,  elected  by  the  creditors 
and  stockholders.  Under  this  form  of  government,  the 
affairs  of  the  bank  were  prosperously  conducted;  but 
the  further  increase  of  the  public  debts,  and  the  acquire- 
ment of  towns  and  territories  as  security,  among  which 
were  the  port  of  Caff  a  and  the  little  kingdom  of  Corsica, 
made  the  business  of  the  bank  much  more  complex ;  and 
the  inconvenience  of  annual  successions  of  new  protectors 
becoming  apparent,  determined  the  Genoese,  in  the  year 
1444,  to  elect  eight  new  governors  for  the  management 
of  the  bank,  of  which  only  two  were  to  go  out  every  year. 

The  rirst  Bills  of  Exchange. 

Before  the  discovery  of  the  passage  to  the  Indias,  by 
the  Cape  of  Good  Hope,  the  Venetians  enjoyed  a  mo- 
nopoly of  the  lucrative  trade  of  the  east,  by  means  of  the 
Mamelukes  of  Egypt,  with  whom  they  were  leagued  by 
poHcy  and  interest,  which  diffused  opulence  and  wealth 
throughout  Italy.     This  extensive  commerce  created 


THE  ORIGIN  OF  BANKING.  57 

and  gave  circulation  to  bills  of  exchange,  the  credit  and 
currency  of  which  were  universally  acknowledged  when 
they  bore  the  signature  of  the  banks  of  Italy,  and  for 
several  centuries  there  were  no  other  establishments  of 
the  kind  in  Europe. 

The  Bank  of  Amsterdam. 

The  Bank  of  Amsterdam  was  established  on  the  31st 
of  January,  1609.  The  magistrates  of  the  city,  under 
authority  of  the  States,  declared  themselves  the  perpetual 
cashiers  of  the  inhabitants,  and  that  all  payments  above 
600  gilders  (afterwards  reduced  to  300)  and  bills  of  ex- 
change, should  be  made  in  the  bank ;  which  obliged  mer- 
chants to  open  accounts  with  it  for  the  payment  of  their 
foreign  bills.  The  extensive  commerce  of  Amsterdam 
involved  such  a  vfiriety  of  transactions  that  the  expedi- 
ency of  regulating  them  became  evident,  and  no  meas- 
ure could  more  effectually  secure  property,  check  law- 
suits, and  prevent  frauds,  than  the  establishment  of  a 
bank  office,  in  which  all  receipts  and  payments  were  reg- 
istered in  books  kept  open  for  the  purpose. 

Dr.  Smith  ascribes  the  origin  of  this  bank  to  the  de- 
based state  of  the  current  coin  which  the  trade  of  Am- 
sterdam brought  from  all  quarters  of  Europe,  and  which 
was  sold  at  a  reduction  of  nine  per  cent,  below  the  money 
of  the  mint.  Merchants,  in  such  cases,  could  not  always 
find  standard  money  to  pay  bills  of  exchange,  the  value 
of  which  was  always  uncertain;  and  accordingly  oper- 
ated against  the  United  Provinces  with  foreign  nations. 
But  as  the  bank  received  the  debased,  light,  or  worn  coin, 
at  its  mtrinsic  value,  in  the  good  money  of  the  country, 


58  THE  OEIOIN  or  BANKING. 

and  gave  credit  for  the  amount  in  its  books,  an  invari- 
able standard  was  thus  estabUshed,  that  tended  greatly 
to  simplify  and  facilitate  the  operations  of  commerce. 

Bank  Money  at  a  Premium. 

The  beneficial  effects  of  this  establishment  in  Holland 
were  soon  perceived,  and  bank  money  immediately  bore 
a  premium  called  the  agio,  which  is  a  term  to  denote  the 
difference  of  price  between  the  money  of  the  bank  and 
the  coin  of  the  country. 

When  we  consider  that  coin  is  only  a  representative 
of  commodities,  and  that  its  utility  arises  only  from  its 
being  a  generally  acknowledged  standard  of  value,  by 
which  mankind  in  the  civilized  state  of  society  are  enabled 
to  calculate  the  price  of  articles  of  exchange,  it  was  not 
surprising  that  bank  receipts,  which  represent  property 
also,  and  at  the  same  time  are  not  liable  to  risk,  danger, 
or  deterioration  of  any  kind,  should  be  held  in  higher  es- 
timation than  coin,  which  is  exposed  to  robbery,  and  all 
sorts  of  casualties. 

In  all  countries  where  banks  have  been  regular  in  their 
transactions  and  their  responsibility  undoubted,  their 
paper  has  carried  a  premium,  more  or  less,  according  to 
circumstances,  and  the  agio  of  Amsterdam  was  generally 
about  five  per  cent. 

The  Bank  Capital. 
The  amount  of  capital  of  the  Bank  of  Amsterdam  was 
never  exactly  ascertained.  It  was  originally  constituted 
by  deposits  of  coin,  and  there  was  full  value  in  its  coffers 
for  all  the  credits  and  receipts  it  issued.  The  bank,  how- 
ever, gave  credit  and  receipts  also  upon  deposits  of  gold 
and  silver  bullion,  at  the  rate  of  five  per  cent  less  than  the 


THE  ORIGIN  OF  BANKING.  59 

mint  price  of  such  bullion,  which  was  restored  to  the 
owner  if  he  called  for  it  within  six  months,  upon  paying 
one- fourth  per  cent  if  the  deposit  was  in  silver,  or  one- 
half  per  cent  if  in  gold.  But  if  the  term  of  six  months 
was  allowed  to  expire,  the  bank  retained  the  bullion  at  the 
price  stated  in  its  books. 

The  advantage  of  making  deposits  in  this  bank  was 
two-fold:  First,  the  credit  enabled  the  merchant  to  pay 
his  bills  of  exchange ;  second,  the  receipt  gave  him  an  op- 
portunity of  selling  his  bullion  at  an  advance  price,  if  the 
market  should  fluctuate  in  his  favor.  "Although  none 
could  draw  out  bullion  without  producing  a  receipt,  and 
reassigning  bank  money  equal  to  the  price  at  which  the 
bullion  had  been  received,  yet  it  was  not  absolutely  nec- 
essary that  both  credit  and  receipt  should  always  remain 
in  the  hands  of  the  same  person ;  as  he  who  had  the  receipt 
could  find  bank  money  to  buy  at  the  market  price,  to  en- 
able him  to  relieve  the  bullion,  and  the  owner  of  the 
credit  could  at  all  times  find  receipts  in  abundance ;  but  to 
prevent  any  extraordinary  rise  in  the  price  of  bank 
money,  or  receipts,  which  speculation  or  other  causes 
might  sometimes  induce,  the  lank  adopted  the  resolution 
of  selling  bank  money  for  the  current  coin,  at  an  agio 
of  five  per  cent,  and  buying  it  at  the  rate  of  four. 

"The  city  of  Amsterdam  was  guaranty  that  there 
should  always  be  full  value  in  the  bank  to  answer  all  its 
demands;  and  as  the  directors,  who  were  annually 
changed,  compared  the  treasure  with  the  books,  under 
solemn  oath,*  *  *  there  could  be  no  probability  of 
fraud." 


60  THE  OEIGESr  OF  BANKING. 

Managed  by  the  Burgomasters. 
The  four  reigning  burgomasters  were  invested  with 
the  direction  of  the  bank,  and  the  city  of  Amsterdam  de- 
rived a  considerable  revenue  from  it,  which  arose  from 
the  following  sources:  "For  all  deposits,  a  fourth  or  half 
per  cent  had  to  be  paid ;  from  every  person  who  opened 
an  account,  a  fee  of  ten  gilders  was  exacted,  and  for  ev- 
ery additional  account,  three  gilders  three  stivers;  for 
every  transfer,  two  stivers,  or  six  stivers  if  the  transfer 
was  less  than  three  hundred  gilders.  If  any  person  over- 
drew his  account,  he  was  fined  three  per  cent  on  the 
amount,  and  his  order  was  set  aside.  There  was  also  a  con- 
siderable profit  on  the  sale  of  foreign  coin,  or  bullion, 
which  was  always  kept  till  it  could  be  sold  to  advantage ; 
and  Hkewise  by  selling  bank  money,  at  five  per  cent  agio, 
and  buying  it  at  four. 

Through  these  various  resources,  the  Bank  of  Amster- 
dam became  rich  and  prosperous,  and  it  was  supposed  to 
retain  in  its  repositories  more  gold  and  silver  than  any 
other  estabhshment  of  the  kind  in  Europe, 

A  Model  for  European  Banks. 

The  Bank  of  Amsterdam  was  the  model  on  which  were 
formed  many  of  the  older  European  banks,  but  they 
have  varied  very  considerably  from  each  other,  according 
to  the  circumstances  of  the  respective  countries  in  which 
they  have  been  estabUshed. 

The  Bank  of  North  America. 
The  Bank  of  North  America- owed  its  origin  to  the 
vigorous  mind  and  enterprising  genius  of  Robert  Mor- 
ris, who  conceived  the  idea  of  it  when  superintendent  of 


THE  OEIGIN  OF  BANKING.  61 

the  public  finances,  and  submitted  to  Congress  in  the 
month  of  May,  in  the  year  1781,  the  plan  for  establish- 
ing a  national  bank  of  North  America. 

Agreeably  to  this  plan,  the  capital  was  to  consist  of 
1,000  shares,  of  $400  each,  or  $400,000,  payable  in  gold 
and  silver,  to  be  increased  by  new  subscriptions,  from 
time  to  time,  at  the  pleasure  of  the  directors.  The  di- 
rectors, twelve  in  number,  were  to  be  chosen  by  the  stock- 
holders, and  were  to  be  intrusted  with  the  management 
of  the  institution.  The  notes  of  the  bank  payable  on  de- 
mand were  to  be  made  a  legal  tender  in  the  discharge  of 
duties,  taxes,  etc. 

On  the  26th  of  May,  in  the  same  year.  Congress 
approved  of  the  plan,  and  passed  several  resolutions,  by 
which  it  pledged  itself  to  support  the  proposed  institu- 
tion; to  incorporate  the  subscribers,  under  the  name  of 
the  president,  directors,  and  company  of  the  Bank  of 
North  America;  to  reconmiend  to  the  several  states  the 
prevention  of  similar  establishments  within  their  respec- 
tive jurisdictions,  during  the  war;  to  receive  the  notes  of 
the  institution  in  payment  of  taxes,  duties,  and  debts  due 
to  the  United  States,  and  to  use  its  influence  with  the  sev- 
eral legislatures,  to  have  laws  passed,  which  should  make 
it  a  felony  to  counterfeit  the  notes  of  the  bank,  etc. 

After  this,  subscriptions  were  immediately  opened, 
during  the  summer  and  autumn  of  the  same  year.  In 
November,  directors  were  chosen.  In  December,  Con- 
gress, conformably  to  its  former  resolutions,  passed  an 
ordinance  which  created  the  subscribers  to  the  bank  a 
corporation  for  ever,  under  the  title  of  "The  President, 
Directors,  and  Company  of  the  Bank  of  North  Amer- 
ica."   The  original  features  of  the  plan  were  preserved. 


62  THE  ORIGIN  OF  BANKING. 

but  the  bank  was  restricted  from  holding  property  ex- 
ceeding the  amount  of  $10,000,000. 

The  institution  commenced  its  operations  in  the  month 
of  January  following,  and  Robert  Morris,  who  may  be 
justly  styled  the  father  of  the  system  of  credit  and  paper 
circulation  in  the  United  States,  succeeded  in  securing 
for  it  the  good- will  and  confidence  of  the  people  at  large, 
by  various  judicious  measures,  of  which  a  circular  letter, 
addressed  to  the  governors  of  the  several  states,  explain- 
ing the  object  of  the  institution,  and  the  certain  advan- 
tages to  be  derived  from  it,  was  not  the  least  effectual. 

"Thus  the  first  bank  in  the  United  States  came  into  ex- 
istence, and  such  was  its  happy  and  immediate  influence 
on  the  public  finances,  and  on  commercial  concerns  in 
general,"  says  Gk)ddard  in  his  History  of  Banking  In- 
stitutions, "that  it  may  be  justly  doubted  whether,  with- 
out its  seasonable  aid,  the  revolutionary  struggle  for  in- 
dependence could  have  been  brought  to  a  satisfactory 
termination. 

"The  United  States,  for  several  years,  wa«  constantly 
indebted  to  the  bank,  to  a  larger  sum  than  the  stock 
they  owned ;  nor  could  the  various  devices  for  creating  a 
revenue  have  answered  their  end,  or  the  army  have  been 
fed  and  clothed,  or  any  degree  of  order  and  punctuality 
maintained  in  the  dispatch  of  public  affairs  but  for  the 
great  facility  in  the  management  of  business,  and  the 
restoration  of  confidence,  which  were  created  by  this 
institution.  The  sense  of  the  great  utility  of  the  bank, 
was  so  universal,  that  Massachusetts  and  Pennsylvania 
corroborated  the  ordinances  of  Congress,  by  additional 
charters,  and  Rhode  Island,  Connecticut,  and  Delaware 


THE  OEIOIN  OF  BANKING.  6S 

passed  laws  for  the  purpose  of  preventing  the  counter- 
feiting of  its  notes. 

"Yet  when  peace  had  been  concluded,  and  the  pressure 
of  the  times  was  over,  there  were  not  wanting  those  who 
viewed  the  prosperous  state  of  the  affairs  of  the  bank 
with  a  jealous  eye,  and  conjured  up  imaginary  fears  of 
an  overbearing  oppression,  an  alarming  foreign  influ- 
ence, and  fictitious  credit,  from  temporary  punctuality; 
of  a  created  scarcity  of  specie ;  possible  commercial  con- 
vulsions, from  the  stopping  of  discounts ;  partial  favors, 
and  comparative  disadvantages,  under  which  distant 
traders  labored;  as  if,  in  a  moral  community,  the  bare 
possibility  of  abuse  could  ever  furnish  a  good  argument 
against  the  decided  utility  of  a  thing ;  or  as  if  a  benefit 
were  to  be  relinquished,  because  all  cannot  be  benefited 
alike.  And  so  effectually  were  those  objections  against 
the  institution  urged,  that  on  the  13th  of  September, 
1785,  the  legislature  of  Pennsylvania  actually  repealed 
their  charter." 

The  repeal  was  persevered  in  by  the  succeeding  legis- 
lature, notwithstanding  innumerable  petitions  to  the  con- 
trary, and  vast  efforts  to  enlighten  their  proceedings. 

The  bank,  however,  continued  its  usual  operations 
under  the  charter  from  Congress,  and  in  the  enjoyment 
of  corporate  rights,  which,  it  was  presumed,  could  not 
be  arbitrarily  wrested  from  them  after  having  been  once 
legally  bestowed. 

The  legislature  which  met  in  December,  1786,  at  last 
thought  proper  to  renew  the  charter  of  the  bank,  and 
passed  an  act  to  that  effect,  on  the  7th  of  March,  1787,  by 
which,  however,  the  term  of  the  charter  was  limited  to 


64  THE  ORIGIN  OF  BANKING. 

fourteen  years,  and  the  capacity  of  the  corporate  body 
of  holding  property  was  restricted  to  two  millions  of 
dollars.  The  same  charter  was  extended  for  the  term  of 
fourteen  years  more,  by  an  act  passed  on  the  20th  of 
March,  1799. 


CHAPTER  IV. 

EARLY  BANKING  IN  ENGLAND. 

There  are  four  principal  branches  or  functions  of  the 
business  of  modem  banking,  namely,  ( 1 )  the  exchanging 
of  money;  (2)  the  lending  of  money;  (3)  the  borrowing 
of  money;  (4)  the  transmitting  of  money.  It  is  in  this 
order  that  the  various  functions  seem  to  have  originated 
in  most  countries.  We  trace  below  the  rise  of  banking 
in  Englandj  as  a  leading  and  typical  commercial  nation. 


1. — Money-Changing. 

For  several  centuries  the  only  coin  current  in  England 
was  made  of  silver,  and  the  highest  denomination  was 
the  silver  penny.  This  coin  contained  about  half  as 
much  silver  as  one  of  the  modern  sixpences.  There  were 
also  silver  half -pence  and  silver  farthings,  and  fre- 
quently the  silver  pennies  were  cut  into  halves  and  quar- 
ters to  serve  the  purpose  of  half -pence  and  farthings, 
until  laws  were  made  to  prohibit  the  practice.  Copper 
was  not  coined  in  England  until  the  year  1609,  and  then 
the  small  leaden  token  previously  issued  by  private  indi- 
viduals was  suppressed. 

Gold  was  first  coined  in  England  in  1257,  but  soon 
went  out  of  circulation,  and  did  not  enter  permanently 
into  currency  until  1344  when  Edward  III  issued  gold 
nobles,  half  nobles,  and  farthing  nobles;  the  noble  to  pass 
for  6s.  8d.,  the  half  noble  for  3s.  4d.,  and  the  farthing 
noble  for  Is.  8d. 

d5 


.:B.L.  Vol.  4—5 


06  S4JELT  BANSlirO  IN  ENGLAND. 

The  Office  of  Royal  Exchanger. 
This  coinage  seems  to  have  given  rise  to  the  office  of 
Royal  Exchanger.  We  find  the  following  in  Henry's 
History  of  England:  "It  was  not  so  easy  a  matter  in 
the  times  we  are  now  considering  to  exchange  gold  and 
silver  coins  for  each  other  as  it  is  at  present,  and  therefore 
Edward  III  and  several  of  his  successors  took  this  office 
into  their  own  hands,  to  prevent  private  extortion  as 
well  as  for  their  own  advantage,  and  they  performed 
it  by  appointing  certain  persons,  furnished  with  a  com- 
petent quantity  of  gold  and  silver  coins,  in  London  and 
other  towns,  to  be  the  only  exchangers  of  money,  at  the 
following  rate : — When  these  royal  exchangers  gave  sil- 
ver coins  for  a  parcel  of  gold  nobles,  for  example,  they 
gave  one  silver  penny  less  for  each  noble  than  its  current 
value,  and  when  they  gave  gold  nobles,  for  example,  they 
gave  one  silver  penny  less  for  each  noble  than  its  current 
value,  and  when  they  gave  gold  nobles  for  silver  coins 
they  took  one  penny  more,  or  6s.  9d.  for  each  noble,  by 
which,  in  every  transaction,  they  made  a  profit  of  1  1-5 
per  cent.  These  royal  exchangers  had  also  the  exclusive 
privilege  of  giving  the  current  coins  of  the  kingdom  in 
exchange  for  foreign  coins,  to  accommodate  merchant- 
strangers,  and  of  purchasing  light  money  for  the  use  of 
the  mint.  As  several  laws  were  made  against  exporting 
English  coin,  the  king's  exchangers  at  the  several  sea- 
ports furnished  merchants  and  others  who  were  going 
beyond  seas  with  the  coins  of  the  countries  to  which  they 
were  going,  in  exchange  for  English  money,  according 
to  a  table  which  hung  up  in  their  office  for  pubhc  in- 
spection.   By  these  various  operations  ihey  made  oc«i- 


EAELY  BANKING  IN  ENQIiA3S».  OT 

siderable  profits,  of  which  the  king  had  a  certain  share. 
The  house  in  which  the  royal  exchanger  of  any  town 
kept  his  office  was  called  the  Exchange,  from  which  it  is 
probable  the  public  structures  where  merchants  meet  for 
transacting  business  derive  their  name." 

Re-established  by  Charles  I. 

This  institution  continued  until  the  middle  of  the  reign 
of  Henry  VIII,  when  it  fell  into  disuse.  It  was  re- 
established in  1627,  by  Charles  I,  who  then  issued  the 
following  proclamation :  — 

"Whereas  the  exchange  of  all  manner  of  gold  and  sil- 
ver current  in  moneys  or  otherwise,  as  the  buying,  selling 
and  exchanging  of  all  manner  of  bullion,  in  species  of 
foreign  coins,  billets,  ingots,  etc.,  fine,  refined,  or  alloyed 
howsoever,  being  fit  for  our  mint,  hath  ever  been  and 
ought  to  be  our  sole  right,  as  part  of  our  prerogative, 
royal  and  ancient  revenue,  wherein  none  of  our  subjects 
of  whatever  trade  or  quality  soever,  ought  at  all,  without 
any  special  license,  to  intermeddle,  the  same  being  pro- 
hibited by  divers  Acts  of  Parliament  and  Proclamations, 
both  ancient  and  modern.  And  whereas  ourself  and  div- 
ers of  our  royal  predecessors  have,  for  some  time  past, 
tolerated  a  promiscuous  kind  of  liberty  to  all,  but  especi- 
ally to  some  of  the  mystery  and  trade  of  goldsmiths 
in  London  and  elsewhere,  not  only  to  make  the  said  ex- 
changes, but  to  buy  and  sell  all  manner  of  buUion,  and 
from  thence  some  of  them  have  grown  to  that  licentioui- 
ness,  that  they  have  for  divers  years  presumed,  for  their 
private  gain,  to  sort  and  weigh  all  sorts  of  money  current 
within  our  realm,  to  the  end  to  cull  out  the  old  and  new 
moneys,  which,  either  by  not  wearing  or  by  any  other 


68  EASLY  BANKING  IN  ENGLAND. 

accident,  are  weightier  than  the  rest,  which  weightiest 
moneys  have  not  only  been  molten  down  for  the  making 
of  plate,  etc.,  but  even  traded  in  and  sold  to  merchant- 
strangers,  etc.,  who  have  exported  the  same,  whereby 
the  consumption  of  coins  has  been  greatly  occasioned, 
as  also  the  raising  of  the  silver  even  of  our  own  moneys 
to  a  rate  above  what  they  are  truly  current  for,  by  reason 
whereof  no  silver  can  be  brought  up  to  our  mint  but  to 
the  loss  of  the  bringers,  etc.  For  the  reforming  of  all 
which  abuses  we  have,  by  the  advice  of  our  Privy  Council, 
determined  to  assume  our  said  right,  for  our  own  profit 
and  the  good  of  the  realm,  and  for  this  end  we  do  now 
appoint  Henry,  Earl  of  Holland,  and  his  deputies,  to 
have  the  office  of  our  changes,  exchangers,  and  out- 
changes  whatsoever,  in  England,  Wales,  and  Ireland. 
And  we  do  hereby  strictly  charge  and  command  that  no 
goldsmith  nor  other  person  whatsoever,  other  than  the 
said  Earl  of  Holland,  do  presume  to  change,  etc." 

The  King's  Prerogative. 

As  this  measure  occasioned  some  dissatisfaction,  the 
king  authorized,  in  the  following  year,  the  publication  of 
a  pamphlet,  entitled  "Cambium  Regis,  or  the  Office  of 
his  Majesty's  Exchanger  Royal."  In  this  pamphlet  it 
was  attempted  to  be  shown : — 

"That  the  prerogative  of  exchange  of  bullion  for  coin 
has  always  been  a  flower  of  the  Crown,  of  which  instances 
are  quoted  from  the  time  of  King  Henry  I  downward. 
That  King  John  farmed  out  that  office  for  no  smaller  a 
sum  than  five  thousand  marks — that  the  place  or  office 
where  the  exchange  was  made  in  his  reign  was  near  St. 
Paul's  Cathedral  in  London,  and  gave  name  to  the  street 


EAELY  BANKING  IN  ENGLAND.  69 

still  called  the  Old  'Change — that  in  succeeding  reigns 
there  were  several  other  places  for  those  exchangers  be- 
sides London — that  this  method  continued  to  Henry  the 
Eighth's  times,  who  suffered  his  coin  to  be  so  far  debased 
that  no  regular  exchange  could  be  made — that  the  same 
confusion  made  way  for  the  London  goldsmiths  to  leave 
off  their  proper  trade  of  goldsmithrie,  i.  e.,  the  working 
and  selling  of  new  gold  and  silver  plate,  and  manu- 
facture, the  sole  intents  of  all  their  charters,  and  to  turn 
exchangers  of  plate  and  foreign  coins  for  our  English 
coins,  although  they  had  no  right  to  buy  any  gold  or 
silver  for  any  other  purpose  than  for  their  manufacture 
aforesaid,  neither  had  any  other  person  but  those  substi- 
tuted by  the  Crown  a  right  to  buy  the  same.  The  king, 
therefore,  has  now  resumed  this  office,  not  merely  to  keep 
up  his  right  so  to  do,  but  likewise  to  prevent  those  traf- 
ficking goldsmiths  from  culling  and  sorting  all  the 
heavy  coin,  and  selling  the  same  to  the  mint  of  Holland, 
which  gained  greatly  thereby,  or  else  by  melting  those 
heavy  coins  down  for  making  of  plate,  witness  the  pieces 
of  thirteenpence-half penny,  old  shillings  of  Queen  Eliza- 
beth, ninepenny  and  f ourpenny-halfpenny  pieces,  which, 
being  weighty  moneys,  none  of  them  were  now  to  be  met 
with,  whereby  they  have  raised  the  price  of  silver  to  two- 
pence per  ounce  above  the  value  of  the  mint,  which 
thereby  has  stood  still  ever  since  the  eleventh  of  King 
James — that  for  above  thirty  years  past  it  has  been  the 
usual  practice  of  those  exchanging  goldsmiths  to  make 
their  servants  run  every  morning  from  shop  to  shop  to 
buy  up  all  weighty  coins  for  the  mints  of  Holland  and 
the  East  countries,  whereby  the  king's  mint  has  stood 
stiU." 


TO  EAELY  BANKING  IN  ENGLAND. 

Not  only  the  Goldsmiths'  Company  of  London,  but 
the  lord  mayor,  court  of  aldennen,  and  common  council, 
petitioned  against  the  revival  of  the  office  of  the  Royal 
Exchanger,  says  J.  W.  Gilbart  in  his  History  of  Bank- 
ing. They  were  not,  however,  successful ;  and  on  a  second 
application  of  the  Goldsmiths'  Company,  the  king  told 
them  "to  trouble  him  no  farther,  since  his  right  to  the 
office  was  undoubtedly  clear.'*  After  the  death  of  Charles 
I,  however,  this  office  was  not  continued,  and  the  business 
of  money-changing  fell  again  into  the  hands  of  the 
goldsmiths.  Their  shops  were  situated  chiefly  on  the 
south  row  of  Cheapside,  and  extended  from  the  street 
called  the  Old  'Change  unto  Bucklersbury. 


2.— Money-Lending. 

That  part  of  the  business  of  banking  which  consists  in 
the  lending  of  money  was  conducted  during  the  Middle 
Ages  under  severe  restraints.  The  taking  of  interest  for 
the  loan  of  money  was  deemed  sinful,  and  stigmatized 
with  the  name  of  usury.  This  opinion  appears  to  be 
wholly  unwarranted,  either  by  the  principles  of  natural 
equity  or  the  enactments  of  the  Mosaic  law. 

Michaelis  says  in  his  Commentaries  on  the  Laws  of 
Moses:  "The  taking  of  interest  from  Israelites  was 
forbidden  by  Moses ;  not,  however,  as  if  he  absolutely  and 
in  all  cases  condemned  the  practice,  for  he  expressly 
permitted  interest  to  be  taken  from  strangers,  but  out 
of  favor  to  the  poorer  classes  of  the  people.  The  farther 
we  go  back  towards  the  origin  of  nations,  the  poorer  do 
we  commonly  find  them,  and  the  more  strangers  to 
commerce;  and  where  this  is  the  case,  people  borrow,  not 


EAELY  BANKING  IN  ENGLAND.  71 

with  a  view  to  profit,  but  from  poverty,  and  in  order  to 
procure  the  necessaries  of  life;  and  there  it  must  be,  no 
doubt,  a  great  hardship  to  give  back  more  than  has  been 
gotten.  The  taking  of  interest  from  strangers,  Moses  has 
not  only  nowhere  forbidden,  but  even  expressly  author- 
ized. Hence  it  is  clear  that  he  does  by  no  means  represent 
interest  as  in  itself  sinful  and  unjust.  Any  such  prohi- 
bition of  interest  in  our  age  and  coimtry  w^ould,  without 
doubt,  be  unjust  towards  lenders,  and  destructive  to 
trade  of  every  description.  Among  all  the  remnants  of  ' 
ancient  laws,  it  would  be  difficult  to  find  one  which,  in  the 
present  state  of  society,  it  would  be  more  fooHsh  and 
hurtful  to  revive  and  enforce.  It  would  only  suit  a  state 
so  constituted  as  was  that  of  the  Israehtes  by  Moses." 

Early  Rates  of  Interest.     ' 

The  taking  of  interest  for  the  loan  of  money  was  first 
prohibited  in  England  by  Edward  the  Confessor.  This 
law,  however,  appears  to  have  become  obsolete;  for,  in 
a  council  held  at  Westminster,  in  the  year  1126,  usury 
was  prohibited  only  to  the  clergy,  who,  in  case  they  prac- 
tised it,  were  to  be  degraded ;  and  in  another  Council,  held 
twelve  years  afterwards,  it  was  decreed  that,  "such  of  the 
clergy  as  were  usurers  and  hunters  after  sordid  gain,  and 
for  the  pubhc  employments  of  the  laity,  ought  to  be  de- 
graded." 

The  earliest  mention  in  English  history  of  a  certain 
yearly  allowance  for  the  usury  or  interest  of  money,  is 
in  the  year  1199,  the  tenth  and  last  year  of  Richard  I. 
In  this  case  the  rate  of  interest  was  10  per  cent.  This 
appears  to  have  been  the  ordinary  or  market-rate  of  in- 
Itsegt  from  that  period  until  the  time  of  Henry  VIII, 


7*  EAELY  BANKING  IN  ENGLAND. 

but  there  are  many  instances  on  record  of  a  much  higher 
rate  of  interest  being  taken,  especially  by  the  Jews  and 
the  Lombards,  who,  in  those  times,  were  the  principal 
money-lenders.  The  exorbitant  interest  taken  by  them 
is  supposed  by  eminent  writers  to  have  been  the  effect 
of  the  prohibition  of  usury. 

The  Jews,  who  were  previously  famous  in  foreign 
countries  for  their  "egregious  cunning  in  trade  and  in  the 
practice  of  brokerage,"  arrived  in  England  about  the 
time  of  the  Norman  Conquest  (1066)  and  soon  became 
remarkable  for  wealth  and  usury.  *'The  prejudices  of 
the  age,"  says  Hume,  "had  made  the  lending  of  money 
on  interest  pass  by  the  invidious  name  of  usury;  yet  the 
necessity  of  the  practice  had  still  continued  it,  and  the 
greater  part  of  that  kind  of  dealing  fell  everywhere  in- 
to the  hands  of  the  Jews.  The  industry  and  frugality 
of  this  people  had  put  them  in  possession  of  all  the  ready 
money,  which  the  idleness  and  profusion  common  to  the 
English  with  the  European  nations  enabled  them  to  lend 
at  exorbitant  and  unequal  interest." 

Henry  III  prohibited  the  Jews  taking  more  than 
twopence  a  week  for  every  20  shilUngs  they  lent  to  the 
scholars  at  Oxford.  This  is  after  the  rate  of  £43  6s.  8d. 
per  cent,  per  annum.  Peter  of  Blois,  Archdeacon  of 
Bath,  writes  thus  to  his  friend  the  Bishop  of  Ely:  "I 
am  dragged  to  Canterbury  to  be  crucified  by  the  per- 
fidious Jews  amongst  their  other  debtors,  whom  they 
ruin  and  torment  with  usury.  The  same  sufferings  await 
me  also  at  London,  if  you  do  not  mercifully  interpose  for 
my  deliverance.  I  beseech  you,  therefore,  O  most  Rev. 
Father  and  most  loving  friend,  to  become  bound  to  Sam- 


EARLY  BANKING  IN  ENGLAND.  78 

son  the  Jew  for  £6  which  I  owe  him,  and  thereby  de- 
liver me  from  that  cross." 

Expulsion  of  the  Jews. 

The  wealth  and  the  rapacity  of  the  Jews  occasioned 
the  most  cruel  proceedings  against  them  on  the  part  of 
both  the  /populace  and  the  Government.  These  perse- 
cutions terminated  by  their  expulsion  from  England  in 
the  year  1290.  They  were  not  readmitted  until  the  time 
of  Oliver  Cromwell. 

On  this  occasion  the  Protector  summoned  an  assembly 
to  debate  two  questions:  1st,  whether  it  were  lawful  to 
tolerate  the  Jews;  2nd,  if  it  were,  on  what  conditions? 
The  assembly  consisted  of  two  judges,  seven  citizens  of 
London,  among  whom  were  the  lord  mayor  and  the  sher- 
iffs, and  fourteen  divines.  The  judges  considered  toler- 
ation merely  as  a  point  of  law,  and  declared  they  knew 
of  no  law  against  it,  and  that  if  it  were  thought  useful 
to  the  State,  they  would  advise  it.  The  citizens  viewed 
it  in  a  commercial  light,  and  they  were  divided  in  their 
opinion  about  its  utility.  Both  these,  however,  despatched 
the  matter  briefly;  but  the  divines  violently  opposed  it 
by  text  after  text  for  four  whole  days.  Cromwell  was  at 
length  so  weary  that  he  told  them  he  had  hoped  they 
would  have  thrown  some  light  on  the  subject  to  direct  his 
conscience,  but,  on  the  contrary,  they  had  rendered  it 
more  obscure  and  doubtful  than  before ;  that  he  desired, 
therefore,  no  more  of  their  reasonings,  but  lest  he  should 
do  anything  rashly,  he  begged  a  share  in  their  prayers. 

The  Lombards  as  Usurers. 
Previous  to  the  expulsion  of  the  Jews,  the  Lombards 
had  settled  in  England,  and  they  soon  became  as  great 


f4  EAELY  BANKING  IN  ENGLAND. 

usurerf  aa  the  Jews  themselves.  By  Lombards  ware  gen- 
•rally  understood  Italian  merchants  from  the  four  ro- 
publics  of  Genoa,  Lucca,  Florence,  and  Venice. 

The  foreign  commerce  of  those  times  was  usually 
carried  on  by  companies  of  merchants  who,  on  payment 
of  certain  duties,  were  invested  by  the  Government  with 
a  monopoly  of  the  trade  to  those  countries  of  which  they 
were  natives,  and  they  also  possessed  peculiar  privileges. 

"As  the  Lombards  engrossed  the  trade  of  every  king- 
dom in  which  they  settled,  they  soon  became  masters  of 
its  cash.  Money,  of  course,  was  in  their  hands  not  only 
a  sign  of  the  value  of  their  commodities,  but  became  an 
object  of  commerce  itself.-  They  dealt  largely  as  bank- 
ers. In  an  ordinance,  A.  D.  1295,  we  find  them  styled 
mercatores  and  campsores.  They  carried  on  this,  as  well 
as  other  branches  of  their  commerce,  with  somewhat  of 
that  rapacious  spirit  which  is  natural  to  monopolizers 
who  are  not  restrained  by  the  competition  of  rivals.  An 
opinion  which  prevailed  in  the  Middle  Ages  was,  how- 
ever, in  some  measure  the  cause  of  their  exorbitant  de- 
mands, and  may  be  pleaded  in  apology  for  them. 

"Commerce  cannot  be  carried  on  with  advantage,  un- 
less the  persons  who  lend  a  sum  are  allowed  a  certain  pre- 
mium for  the  use  of  their  money,  as  a  compensation  for 
the  risk  which  they  run  in  permitting  another  to  trafiic 
with  their  stock.  This  premium  is  fixed  by  law  in  all  com- 
mercial countries,  and  is  called  the  legal  interest  of 
money.  But  the  Fathers  of  the  Church  absurdly  applied 
the  prohibitions  of  usury  in  Scripture  to  the  payment  of 
legal  interest,  and  condemned  it  as  a  sin.  The  schoolmen 
adoled  by  Aristotle^  whose  sentiments  they  foUowid^  ioi- 


EAELY  BANKING  IN  ENGLAND.  75 

plicitly  and  without  examination  adopted  the  same  error 
and  enforced  it.  Thus  the  Lombards  found  themselves 
engaged  in  a  traffic  which  was  deemed  criminal  and 
odious.  They  were  liable  to  punishment  if  detected. 
They  were  not  satisfied,  therefore,  with  that  moderate 
premium  which  they  might  have  claimed,  if  their  trade 
had  been  open  and  authorized  by  law.  They  exacted  a 
sum  proportional  to  the  danger  and  infamy  of  a  dis- 
covery. Accordingly  we  find  it  was  usual  for  them  to  de- 
mand twenty  per  cent,  for  the  use  of  money  in  the  thir- 
teenth century. 

"About  the  beginning  of  that  century  the  Countess  of 
Flanders  was  obliged  to  borrow  money  in  order  to  pay 
her  husband's  ransom.  She  procured  the  sum  requisite, 
either  from  Italian  merchants  or  from  Jews.  The  lowest 
interest  which  she  paid  to  them  was  above  twenty  per 
cent.,  and  some  of  them  exacted  near  thirty.  In  the 
fourteenth  century,  A.  D.  1311,  Phillip  IV  fixed  "the 
interest  which  might  be  legally  exacted  in  the  fairs  of 
Champagne  at  twenty  per  cent.  The  interest  of  money 
in  Arragon  was  somewhat  lower.  James  I  in  A.  D. 
1242,  fixed  it  by  law  at  eighteen  per  cent.  As  late  as  the 
year  1490,  it  appears  that  the  interest  of  money  in  Pia- 
cenza  was  at  the  rate  of  forty  pe.-  cent.  This  is  the  more 
extraordinary,  because  at  that  time  the  conmierce  of  the 
Italian  States  was  become  considerable. 

"It  appears  from  Lud.  Guicciardini  that  Charles  V 
had  fixed  the  rate  of  interest  in  his  dominions  in  the  Low 
Countries  at  twelve  per  cent,  and  at  the  time  when  he 
wrote,  about  the  year  1560,  it  was  not  uncommon  to 
exfuct  more  than  that  sum.    He  complains  of  this  bm 


76  EARLY  BANKING  IN  ENGLAND. 

exorbitant,  and  points  out  its  bad  effects  both  on  agri- 
culture and  commerce.  This  high  interest  on  money  is 
alone  a  proof  that  the  profits  on  commerce  were  exorbit- 
ant. The  Lombards  were  also  established  in  England 
in  the  thirteenth  century,  and  a  considerable  street  in  the 
city  of  London  still  bears  their  name.  They  enjoyed 
great  privileges,  and  carried  on  an  extensive  commerce, 
particularly  as  bankers."  [Robertson's  History  of  Char- 
les v.] 

The  English  monarchs  frequently  borrowed  money  of 
the  Lombards,  as  well  as  of  other  public  bodies  and  of 
private  individuals.  The  companies  of  foreign  merchants 
made  advances  of  money,  which  were  repaid  by  the  duties 
on  their  merchandise.  The  oldest  and  wealthiest  of  these 
companies,  the  Steel- Yard  Company,  was  a  kind  of  bank 
to  the  English  kings,  whenever  they  wanted  money 
on  any  sudden  emergency,  but  the  company  was  sure  to 
be  well  paid  in  the  end  for  such  assistance. 

Interest  Made  Legal. 

In  the  year  1546,  the  taking  of  interest  for  money  was 
made  legal  in  England,  and  the  rate  was  fixed  at  ten  per 
cent.  This  Act  was  repealed  in  the  year  1552,  but  it 
was  re-enacted  in  1571.  The  legal  rate  of  interest  was 
reduced  to  eight  per  cent  in  1624,  and  to  six  per  cent  in 
1651.  In  the  year  1714  it  was  reduced  to  five  per  cent. 
After  the  taking  of  interest  was  sanctioned  by  law,  the 
term  usury y  which  was  previously  applied  to  interest  in 
general,  became  limited,  to  denote  a  rate  of  interest 
higher  than  that  which  the  law  allowed. 


EAKLY  BANKING  IN  ENGLAND.  77 

3. — Money-Borrowing. 
That  part  of  the  business  of  banking  which  consists 
in  the  borrowing  of  money,  with  a  view  of  lending  it 
again  at  a  higher  rate  of  interest,  does  not  appear  to 
have  been  carried  on  by  bankers  until  the  year  1645,  when 
a  new  era  occurred  in  the  history  of  banking.  The  gold- 
smiths, who  were  previously  only  money-changers,  now 
became  also  money-lenders.  They  became  also  money 
bort-owers,  and  allowed  interest  on  the  sums  they  bor- 
rowed. They  were  agents  for  receiving  rents.  They  lent 
money  to  the  king  on  the  security  of  the  taxes.  The  re- 
ceipts they  issued  for  the  money  lodged  at  their  houses 
circulated  from  hand  to  hand,  and  were  known  by  the 
name  of  "goldsmiths'  notes."  These  may  be  considered 
as  the  first  kind  of  bank  notes  issued  in  England.  The 
following  account  of  these  banking  goldsmiths  as  given 
by  Gilbart,  is  taken  chiefly  from  Anderson's  "History 
of  Commerce." 

When  the  English  merchants  became  enriched  by  com- 
merce, they  wished  for  a  place  of  security  in  which  they 
might  deposit  their  wealth.  Hence  they  usually  sent 
their  money  to  the  mint  in  the  Tower  of  London,  which 
-became  a  sort  of  bank.  The  merchants  left  their  money 
there  when  they  had  no  occasion  for  it,  and  drew  it  out 
as  they  wanted  it.  But  in  1640,  King  Charles  I  took 
possession  of  £200,000  of  the  merchants'  money  that  had 
been  lodged  in  the  mint  and  from  that  period  the  mer- 
chants kept  their  money  in  their  own  houses,  under  the 
care  of  their  servants  and  apprentices.  On  the  breaking 
out  of  the  civil  war  between  Charles  I  and  the  parlia- 
ment, it  became  very  customary  for  the  apprentices  to 


78  EAELT  BANKING  IN  ENGLAND. 

rob  their  masters,  and  then  run  away  and  join  the  army. 
As  the  merchants  could  now  place  no  confidence  either  in 
the  public  authorities  or  in  their  own  servants,  they  were 
under  the  necessity  of  employing  bankers. 
The  Banking  Goldsmiths. 

'These  bankers  were  the  goldsmiths.  Previous  to  this 
period,  the  business  of  the  goldsmith  was  similar  to  what 
it  is  in  our  own  time.  They  bought  and  sold  plate  and 
foreign  coins;  they  procured  gold  to  be  coined  at  the 
mint,  and  suppUed  refiners,  plate-makers,  and  others 
with  the  precious  metals.  To  deal  in  gold  and  silver 
bullion  to  any  large  extent  implies  the  possession  of  con- 
siderable wealth ;  and  as  all  the  money  in  the  country  then 
consisted  of  gold  and  silver  coin,  it  was  natural  enough 
that  the  goldsmiths  should  become  the  bankers  of  those 
who  had  money  for  which  they  had  no  immediate  use. 

An  account  of  the  bankers  of  those  days  is  related  in 
a  curious  pamphlet,  published  in  the  year  1676,  and  en- 
titled, ''The  Mystery  of  the  New-fashioned  Goldsmiths; 
or  Bankers  Discovered."  The  author  says:  "This  new 
banking  business  soon  grew  very  considerable.  It  hap- 
pened in  those  times  of  civil  commotion,  that  the  Parlia- 
ment, out  of  plates  and  old  coins  brought  into  the  mint, 
coined  seven  millions  into  half-crowns;  and  there  being 
no  mills  then  in  use  at  the  mint,  this  new  money  was  of  a 
very  unequal  weight,  sometimes  twopence  and  threepence 
difference  in  an  ounce,  and  most  of  it  was,  it  seems,  heav- 
ier than  it  ought  to  have  been  in  proportion  to  the  value 
in  foreign  parts.  Of  this  the  goldsmiths  made  naturally 
the  advantage  usual  in  such  cases,  by  picking  out  or  cull- 
ing the  heaviest,  and  melting  them  down  and  exporting 
them. 


"Moreover,  such  merchants'  servants  as  still  kept 
their  masters'  running  cash,  had  fallen  into  a  way  of 
clandestinely  lending  the  same  to  the  goldsmiths  at  four- 
pence  per  cent  per  diem,  who,  by  these  and  such-hke 
means,  were  enabled  to  lend  out  great  quantities  of  cash 
to  necessitous  merchants  and  others,  weekly  or  monthly, 
at  high  interest,  and  also  began  to  discount  the  mer- 
chants' bills  at  the  like  or  higher  interest. 

"Much  about  the  same  time,  the  goldsmiths  (or  new- 
fashioned  bankers)  began  to  receive  the  rents  of  gentle- 
men's estates  remitted  to  town,  and  to  allow  them  and 
others  who  put  cash  in  their  hands  some  interest  for  it,  if 
it  remained  but  a  single  month  in  their  hands,  or  even  a 
lesser  time.  This  was  a  great  allurement  for  people  to 
put  money  into  their  hands,  which  would  bear  interest 
till  the  day  they  wanted  it;  and  they  could  also  draw  it 
out  by  one  hundred  pounds  or  fifty  pounds,  etc.,  at  a 
time  as  they  wanted  it,  with  infinitely  less  trouble  than 
if  they  had  lent  it  out  on  either  real  or  personal  security. 

"The  consequence  was,  that  it  quickly  brought  a  great 
quantity  of  cash  into  their  hands,  so  that  the  chief  or 
greatest  of  them  were  now  enabled  to  supply  Cromwell 
with  money  in  advance,  on  the  revenues,  as  his  occasion 
required,  upon  great  advantages  to  themselves. 

"After  the  Restoration,  King  Charles  II  being  in 
want  of  money,  the  bankers  took  ten  per  cent  of  him 
barefacedly  and  by  private  contracts;  on  many  bills,  or- 
ders, tallies,  and  debts  of  that  king,  they  got  twenty, 
•ometimei  thirty  per  cent,  to  the  great  dishonor  of  the 
igovernment. 

"This  great  gain  induced  the  goldsmiths  more  and 
more  to  beocMne  lenders  to  the  kin^  to  anticipate  aU  the 


80  EABLY  BANKING  IN  ENGLAND. 

revenue,  to  take  every  grant  of  Parliament  into  pawn  as 
soon  ks  it  was  given;  also  to  outvie  each  other  in  bujdng 
and  taking  to  pawn  bills,  orders,  and  tallies,  so  that  in 
effect  aU  the  revenue  passed  through  their  hands." 

Blamed  for  Money  Scarcity. 

The  "new-fashioned  bankers"  were  also  attacked  by 
Sir  Josiah  Child,  in  his  "New  Discourse  of  Trade,"  in 
the  following  terms : 

"And  principally  this  seeming  scarcity  of  money  pro- 
ceeds from  the  trade  of  hankering,  which  obstructs  cir- 
culation, advanceth  usury,  and  renders  it  so  easy,  that 
most  men,  as  soon  as  they  can  make  up  a  sum  of  from 
.£50  to  £100,  send  it  in  to  the  goldsmith,  which  doth  and 
will  occasion,  while  it  lasts,  that  fatal  pressing  necessity 
for  money  visible  throughout  the  whole  kingdom,  both 
to  prince  and  people. 

"A  seventh  accidental  reason  why  land  doth  not  sell  at 
present  at  the  rate  it  naturally  should  in  proportion  to 
the  legal  interest,  is  that  innovated  practice  of  bankers 
in  London,  which  hath  more  effects  attending  it  than 
most  I  have  conversed  with  have  yet  observed;  but  I 
shall  here  take  notice  of  that  only  which  is  to  my  present 
purpose,  viz: — 

"The  gentlemen  that  are  bankers,  having  a  large  in- 
terest from  his  Majesty  for  what  they  advance  upon 
his  Majesty's  revenue,  can  afford  to  give  the  full  legal 
interest  to  all  persons  that  put  money  into  their  hands, 
though  for  never  so  short  or  long  a  time,  which  makes 
the  trade  of  usury  so  easy  and  hitherto  safe,  that  few, 
after  having  found  the  sweetness  of  this  lazy  way  of 
improvement  (being  by  continuance  and  success  grown 


EARLY  BANKING  IN  ENGLAND.  81 

to  fancy  themselves  secure  in  it) ,  can  be  led  (there  being 
neither  ease  nor  profit  to  invite  them)  to  lay  out  their 
money  in  land,  though  at  fifteen  years'  purchase; 
whereas  before  this  way  of  private  banking  came  up, 
men  who  had  money  were  forced  oftentimes  to  let  it  lie 
dead  by  them  until  they  could  meet  with  securities  to 
their  minds,  and  if  the  like  necessity  were  now  of  money 
lying  dead,  the  loss  of  use  for  the  dead  time  being  de- 
ducted from  the  profit  of  six  per  cent  (communibus 
annis)  would  in  effect  take  off  <£l  per  cent  per  annum  of 
the  profit  of  usury,  and  consequently  incline  men  more 
to  purchase  lands,  because  the  difference  between  usury 
and  purchasing  would  not,  in  point  of  profit,  be  so  great 
as  now  it  is,  this  new  invention  of  cashiering  having,  in 
my  opinion,  clearly  bettered  the  usurer's  trade  one  or 
two  per  cent  per  annum.  And  that  this  way  of  leaving 
money  with  goldsmiths  hath  had  the  aforesaid  effect, 
seems  evident  to  me  from  the  scarcity  it  makes  of  money 
in  the  country;  for  the  trade  of  bankers  being  only  in 
London,  doth  very  much  drain  the  ready  money  from 
all  other  parts  of  the  kingdom." 

The  First  Run  on  a  Bank. 

In  the  year  1667  occurred  the  first  run  of  which  we 
have  any  account  in  the  history  of  banking.  The  busi- 
ness of  the  new-fashioned  bankers  had  increased  so  fast, 
and  they  had  become  so  numerous,  that  their  trade  was 
supposed  to  be  at  its  height  in  this  year;  when,  during 
the  time  that  a  treaty  of  peace  was  under  consideration, 
the  Dutch  fleet  sailed  up  the  Thames,  blew  up  the  fort  of 
Sheerness,  set  fire  to  Chatham,  and  burned  four  ships 
of  the  line.     This  disaster  occasioned  great  alarm  in 

I.B.L.  Vol.  4—6 


8i  AAlSLT  BAJSKIIXQ  117  S17QLANB. 

London,  particularly  among  those  who  had  money  in 
their  bankers'  hands,  as  it  was  imagined  that  the  king 
would  not  be  able  to  repay  the  bankers  the  money  they 
had  lent  him.  To  quiet  the  fears  of  the  people,  the  king 
issued  a  proclamation,  declaring  that  the  payments  to 
the  bankers  should  be  made  at  the  Exchequer  the  same 
as  usual. 

In  1672,  five  years  afterwards,  a  much  greater  cala- 
mity befell  the  bankers;  for  King  Charles  II  shut  up 
the  Exchequer,  and  would  not  pay  the  bankers  either  the 
principal  or  the  interest  of  the  money  which  he  had  bor- 
rowed. The  amount  then  due  by  the  king  was  £1,328,- 
526,  which  he  had  borrowed  of  the  bankers  at  eight  per 
cent.,  and  which  he  never  repaid. 

The  mode  in  which  the  bankers  transacted  their  loans 
with  the  king  was  this:  As  soon  as  the  parliament  had 
voted  to  the  king  certain  sums  of  money  out  of  particular 
taxes,  the  bankers  advanced  at  once  the  money  voted  by 
parliament,  and  were  repaid  in  weekly  payments  at  the 
Exchequer  as  the  taxes  were  received.  The  mode  of  mak- 
ing the  payments  and  the  rate  of  interest  were  agreed 
upon  at  the  time  of  making  the  loan. 

The  shutting  up  of  the  Exchequer  occasioned  great 
distress  among  aU  classes  of  the  people.  Persons  not  in 
trade  had  then  no  way  of  employing  their  money  with 
advantage  but  by  placing  it  out  at  interest  in  the  hands 
of  a  banker.  Hence,  not  merchants  only,  but  widows, 
orphans,  and  others,  became  suddenly  deprived  of  the 
whole  of  their  property.  They  came  in  crowds  to  the 
bankers,  but  could  obtain  neither  th^  principal  nor  the  in- 
terest on  the  money  they  had  deposited.  The  clamor  be- 


EAELY  BANKING  IN  ENGIANB.  96 

came  so  great  that  the  king  granted  a  patent  to  pay  six 
per  cent  interest  out  of  his  hereditary  excise ;  but  he  never 
paid  the  principal.  But,  about  forty  years  afterward,  the 
parliament  made  arrangements  by  which  the  debt  was  as- 
sumed to  be  discharged ;  that  is,  it  became  a  part  of  the 
National  Debt,  but  the  creditors  received  nothing. 

The  business  of  banking  remained  entirely  in  the  hands 
of  the  "new-fashioned"  bankers  until  the  establishment 
of  the  Bank  of  England,  in  the  year  1694. 

4. — Transmission  of  Money. 
The  transmission  of  money  was  in  ancient  times  ef- 
fected by  sending  a  messenger  with  the  coin.  During  the 
Middle  Ages,  it  was  accomplished  by  means  of  bills  of 
exchange,  which  were  purchased  by  merchants.  Ulti- 
mately, a  special  class  of  persons  carried  on  this  kind  of 
traffic,  and  purchased  or  sold  bills  to  suit  the  convenience 
of  parties  who  wished  to  deal  with  them.  The  pe- 
cuniary transactions  of  independent  nations  are  still 
adjusted  in  the  same  way.  But  the  transmission  of 
money  from  one  part  of  the  country  to  another  part,  is 
more  frequently  effected  upon  the  principle  of  transfers, 
without  the  passing  of  any  bill.  This  branch  of  banking 
is  fully  dealt  with  elsewhere. 


The  Bank  of  England. 
Previous  to  the  year  1694  there  were  only  four  banks 
of  any  great  consequence  in  Europe,  but  on  the  27th  of 
July  of  that  year  a  charter  was  granted  by  the  reigning 
sovereigns,  William  and  Mary,  for  estabhshing  the 
Bank  of  England,  which  for  opulence,  importance,  and 
extent  of  circulation  became  the  greatest  in  the  world. 


84  EAELY  BANKING  IN  ENGLAND. 

The  object  of  the  promoters  was  to  raise  money  for 
the  use  of  the  government.  When  the  scheme  was 
brought  before  the  parliament,  it  caused  a  long  and  vio- 
lent discussion.  One  party  dwelt  upon  the  national  ad- 
vantages that  would  accrue  from  such  a  measure.  They 
said  it  would  rescue  the  nation  out  of  the  hands  of  ex- 
tortioners and  usurers,  lower  the  rates  of  interest,  raise 
the  value  of  land,  revive  and  establish  public  credit,  ex- 
tend the  circulation,  and  consequently  improve  com- 
merce, facilitate  the  annual  supphes  for  the  national  ex- 
penses, and  connect  the  people  more  closely  with  the  gov- 
ernment. 

The  opposition  party  declared  that  such  a  bank  would 
become  a  monopoly  and  engross  the  whole  money  of  the 
kingdom;  that  it  must  infallibly  become  subservient  to 
government  views,  and  might  be  employed  for  the  worst 
purposes  of  arbitrary  power;  that  instead  of  assisting, 
it  would  weaken  commerce,  by  tempting  people  to  with- 
draw their  money  from  trade  and  employ  it  in  stock- 
jobbing; that  it  would  produce  a  swarm  of  brokers  and 
jobbers  to  prey  upon  their  fellow-creatures,  encourage 
fraud  and  gambling,  and  thus  corrupt  the  morals  of  the 
nation. 

Notwithstanding  these  objections,  the  Act  passed  both 
houses  of  parliament,  and  received  the  royal  assent. 

Opposition  of  Foreign.  Competitors. 

It  was  noticed  that  foreign  competitors  for  English 
trade  strongly  opposed  the  project,  and  not  long  after 
the  bank  had  been  estabhshed.  Bishop  Burnet  wrote: 
"The  advantages  the  king  and  all  concerned  in  tallies  had 
from  the  bank  were  soon  so  sensibly  felt  that  all  people 


EAELY  BANKING  IN  ENGLAND.  85 

saw  into  the  secret  reasons  that  made  the  enemies  of  the 
constitution  set  themselves  with  so  much  earnestness 
against  it.' 

In  the  English  Exchequer,  the  "tallies"  referred  to  by- 
Bishop  Burnet  were  long  used  in  lieu  of  certificates  of 
indebtedness  to  creditors  of  the  state.  These  tallies  were 
seasoned  sticks  of  willow  or  hazel,  notched  on  the  edge  to 
represent  the  amount.  Small  notches  represented  pence ; 
larger  notches  shillings;  and  still  larger,  pounds.  Pro- 
portionately larger  and  wider  notches  represented 
£10,  £100,  or  £1000.  The  stick  being  then  split  longi- 
tudinally, one  piece  was  given  to  the  creditor  and  the 
other  was  laid  away  as  a  record.  When  an  account  was 
presented  for  payment,  the  voucher  was  compared  with 
the  record.  When  paid,  the  tally  and  counter-tally  were 
tied  up  together  and  laid  away,  accumulating  for  a 
long  series  of  years.  This  system  was  in  use  until  1812. 
The  tallies  were  received  as  evidence  in  courts  of  justice. 

The  Act  of  Parliament. 

The  act  of  Parliament  by  which  the  bank  was  estab- 
lished was  entitled,  "An  Act  for  granting  to  their  Ma- 
jesties several  duties  upon  tonnage  of  ships  and  vessels, 
and  upon  beer,  ale,  and  other  liquors,  for  securing  cer- 
tain recompenses  and  advantages  in  the  said  Act  men- 
tioned, to  such  persons  as  shall  voluntarily  advance  the 
sum  of  fiften  hundred  thousand  pounds  towards  carry- 
ing on  the  war  with  France."  After  a  variety  of  enact- 
ments relative  to  the  "'duties  upon  tonnage  of  ships  and 
vessels,  and  upon  beer,  ale,  and  other  liquors,"  the  Act 
authorizes  the  raising  of  £1,200,000  ($6,000,000)  by 
voluntary  subscription,  the  subscribers  to  be  formed  in- 


86  EABJLY  BANKING  IN  ENGLAND. 

to  a  corporation,  and  be  styled  "The  Governor  and  Com- 
pany of  the  Bank  of  England."  The  sum  of  £300,000 
was  also  to  be  raised  by  subscription,  and  the  contribu- 
tors to  receive  instead  annuities  for  one,  two,  or  three 
lives.  Towards  the  £1,200,000  no  one  person  was  to 
subscribe  more  than  £10,000  before  the  first  day  of  July 
next  ensuing,  nor  at  any  time  more  than  £20,000.  The 
corporation  were  to  lend  their  whole  capital  to  govern- 
ment, for  which  they  were  to  receive  interest  at  the  rate 
of  eight  per  cent  per  annum,  and  £4,000  per  annum  for 
management;  being  £100,000  per  annum  in  the  whole. 
The  corporation  were  not  allowed  to  borrow  or  owe 
more  than  the  amount  of  their  capital,  and  if  they  did 
so  the  individual  members  became  liable  to  the  creditors 
in  proportion  to  the  amount  of  their  stock.  The  corpor- 
ation were  not  to  trade  in  any  "goods,  wares,  or  merchan- 
dise whatsoever;"  but  they  were  allowed  to  deal  in  bills 
of  exchange,  gold  or  silver  bullion,  and  to  sell  any  goods, 
wares,  or  merchandise  upon  which  they  had  advanced 
money,  and  which  had  not  been  redeemed  within  three 
months  after  the  time  agreed  upon. 

Provisions  of  the  Charter. 

The  whole  subscription  having  been  filled  in  ten  days, 
a  charter  was  issued  on  the  27th  day  of  July,  1694.  The 
charter  declares: 

"That  the  management  and  government  of  the  cor- 
poration be  committed  to  the  governor,  deputy-governor, 
end  twenty-four  directors,  who  shall  be  elected  between 
the  25th  day  of  March  and  the  25th  day  of  April  each 
year,  from  amon^  the  members  of  the  company  duly 
qualified. 


EAELY  BANKING  IN  ENGLAND,  87 

"That  no  dividend  shall  at  any  time  be  made  by  the 
said  governor  and  company,  save  only  out  of  the  inter- 
est, profit,  or  produce  arising  out  of  the  said  capital, 
stock,  or  fund,  or  by  such  dealing  as  is  allowed  by  Act 
of  Parliament. 

"They  must  be  natural  bom  subjects  of  England,  or 
naturalized  subjects;  they  shall  have  in  their  own  name 
and  for  their  own  use,  severally,  viz.,  the  governor  at 
least  £4,000,  the  deputy-governor  <£3,000,  and  each 
director  £2,000,  of  the  capital  stock  of  the  said  corpora- 
tion. 

"That  thirteen  or  more  of  the  said  governors  or  direc- 
tors (of  which  the  governor  or  deputy-governor  shall 
be  always  one),  shall  constitute  a  court  of  directors  for 
the  management  of  the  affairs  of  the  company,  and  for 
the  appointment  of  all  agents  and  servants  which  may  be 
necessary,  paying  them  salaries  as  they  may  consider 
reasonable. 

"Every  elector  must  have,  in  his  own  name  and  for 
his  own  use,  £500  or  more,  capital  stock,  and  can  only 
give  one  vote ;  he  must,  if  required  by  any  member  pres- 
ent, take  the  oath  of  stock,  or  the  declaration  of  stock 
if  it  be  one  of  those  people  called  Quakers. 

"Four  general  courts  to  be  held  in  every  year,  in  the 
months  of  September,  December,  April,  and  July.  A 
general  court  may  be  summoned  at  any  time,  upon  the 
requisition  of  nine  proprietors  duly  qualified  as  electors. 

"The  majority  of  electors  in  general  courts  have  the 
power  to  make  and  constitute  by-laws  and  ordinances  for 
the  government  of  the  corporation,  provided  that  such 
by-laws  and  ordinances  be  not  repugnant  to  the  laws  of 


88  EARLY  BANKING  IN  ENGLAND. 

the  kingdom,  and  be  conformed  and  approved,  accord- 
ing to  the  statutes  in  such  case  made  and  provided." 

The  above  charter,  which  was  originally  granted  for 
ten  years  only,  has  been  subject  to  many  renewals.  The 
capital  of  the  bank  has  been  vastly  increased  and  its 
operations  have  been  governed  by  numerous  acts  ofpar- 
liament.  It  enjoys  a  wonderful  record  for  wise  and  con- 
servative management,  and  is  an  institution  of  which 
the  entire  British  Empire  is  justly  proud. 

Agents  for  the  Government. 

In  1718,  subscriptions  for  government  loans  were 
first  received  at  the  bank,  and  from  this  period  the 
British  government  has  found  it  more  convenient  to  em- 
ploy the  bank  as  its  agents  in  all  operations  of  this 
nature,  than  to  transact  them  at  the  Treasury  or  the  Ex- 
chequer. The  bank  became  by  degrees  more  closely 
connected  with  the  government,  and  soon  began  to  make 
advances  of  money  in  anticipation  of  the  taxes,  and 
upon  Exchequer  bills  and  other  securities,  by  the  es- 
tablishment of  what  is  now  called  bank  circulation;  that 
is  by  the  issuance  of  secured  notes. 

By  1722,  the  bank  capital  had  increased  by  new  sub- 
scriptions to  a  total  amount  of  approximately  £9,000,- 
000  or  nearly  $45,000,000.  In  1734,  June  5th,  the  direc- 
tors began  to  transact  business  in  their  new  house  in 
Threadneedle  Street,  in  the  heart  of  the  city  of  London. 
The  business  of  the  bank  had  previously  been  carried  on 
at  Grocers'  Hall,  in  the  Poultry.  Since  that  day  "the 
Old  Lady  of  Threadneedle  Street"  has  led  the  financial 
institutions  of  the  world. 


EAELY  BANKING  IN  ENGLAND.  89 

In  1737  there  was  considerable  public  discussion  about 
the  propriety  of  again  renewing  the  bank  charter.  In 
the  course  of  the  public  debate,  the  following  opinion 
of  the  bank  operations  was  expressed  in  the  London 
Magazine: 

"There  certainly  never  was  a  body  of  men  that  con- 
tributed more  to  the  public  safety  than  the  Bank  of  Eng- 
land. This  flourishing  and  opulent  company  have,  upon 
every  emergency,  always  cheerfully  and  readily  sup- 
plied the  necessities  of  the  nation,  so  that  there  never 
have  been  any  difficulties — any  embarrassment — any  de- 
lays in  raising  the  money  which  has  been  granted  by 
parliament  for  the  service  of  the  pubHc;  and  it  may 
very  truly  be  said  that  they  have,  in  very  many  important 
conjunctures,  relieved  the  nation  outof  the  greatest  diffi- 
culties, if  not  absolutely  saved  it  from  ruin." 

Events  in  the  Bank's  History. 

In  1745,  there  was  a  run  upon  the  bank,  occasioned 
by  the  rebellion  in  Scotland,  and  supposed  to  be  for  the 
purpose  of  supplying  the  adherents  of  the  Stuarts  with 
gold.  A  public  meeting  was  held  in  London  and  one 
thousand  one  hundred  and  forty  merchants  signed  a  de- 
claration expressing  their  readiness  to  take  the  bank 
notes. 

The  3  per  cent,  consols  were  established  by  means  of 
the  bank  in  1752  and  have  ever  since  been  a  famous 
government  stock.  The  word  "consols"  is  a  contraction 
for  "consolidated."  Outstanding  government  annuities 
were  consohdated  in  the  3  per  cents. 

In  1758  occurred  the  first  instance  of  a  forgery  of  a 
bank  note.    The  note  was  for  £20,  the  smallest  amount 


90  KART.Y  BANKING  IN  ENGLAND. 

then  in  circulation.  The  forger  was  promptly  convicted 
and  executed. 

In  1782,  the  total  capital  of  the  bank  was  increased 
to  £11,642,400,  or  approximately  $58,000,000.  There 
was  no  further  increase  of  capital  until  the  year  1816, 
since  which  time  it  has  been  largely  increased. 

In  1794,  the  bank  commenced  issuing  its  famous  £5 
notes. 

During  various  periods  of  financial  depression,  the 
government  of  England  has  rendered  assistance  to  the 
bank  by  timely  administrative  action,  enabling  it  to  main- 
tain its  high  reputation  and  meet  all  its  obligations ;  and 
the  bank  on  its  side  has  made  many  advances  to  the  gov- 
ernment, besides  managing  the  public  debt  and  otherwise 
aiding  in  the  operation  of  the  government  finances.  It 
enjoys  certain  exclusive  privileges  of  banking  in  Eng- 
land, and  fixes  the  bank  rate  of  discount  at  regular 
meetings  or  "courts"  of  its  board  of  governors,  which  are 
referred  to  elsewhere  in  connection  with  the  subject  of 
Foreign  Exchange. 

The  Bank  of  England  building  covers  a  whole  block 
bounded  on  the  south  by  the  famous  Threadneedle 
Street.  Outside  it  presents  the  appearance  of  a  blind 
outer  wall  of  a  great  building  without  windows,  and  hav- 
ing here  and  there  ornamental  pillars  and  few  entrances. 
The  plan,  as  shown  in  our  illustration,  is  a  complex 
system  of  Hght-walls,  offices,  court  yards,  etc.,  the  re- 
sult of  growth  and  necessity. 

Among  the  curiosities  in  the  bank  library  is  a  millioB 
pound  bank  note.  Tradition  says  that  there  have  been 
only  four  such  notes  issued.  Samuel  Rogers,  the  poet, 
had  one  framed  and  hung  over  his  parlor  mantelpiece. 


EARLY  BANKING  IN  ENGLAND.  91 

Another  curiosity  in  the  bank  library  is  a  note  for 
£25,  which  had  slumbered  unobserved  for  111  years, 
and  was  then  presented  and  paid.  If  compound  in- 
terest had  been  payable  by  the  bank,  the  owner  could 
have  claimed  over  £60,000. 

About  50,000  notes  of  different  values  are  paid  into 
the  bank  every  day.  These  are  kept  five  years  in  the 
bank  cellars  and  are  then  destroyed  by  burning.  New 
notes  are  always  given  out  in  payment  of  bills  and 
checks. 


Flan  of  the  Bank  of  England. 


CHAPTER  V. 

THE  UTILITY  OF  BANKING. 

In  a  commercial  community  banks  possess  a  large 
sphere  of  usefulness.  Their  utility  has  been  well  de- 
scribed as  six-fold:  First,  they  furnish  a  safe  repository 
for  money ;  second,  they  encourage  thrift  by  the  payment 
of  interest  on  deposits ;  third,  they  render  useful  service 
to  all  engaged  in  production,  transportation  and  ex- 
change of  conmiodities ;  fourth,  they  also  render  useful 
service  to  their  customers  by  furnishing  exchange  and 
otherwise  arranging  for  the  transmission  of  money; 
fifth,  the  check  system  affords  a  useful  record  of  indi- 
vidual expenditures;  sixth,  by  collecting  money  in  a 
large  aggregate,  they  render  it  more  effective  for  pur- 
poses of  trade  and  enterprise. 

But  this  list  does  not  include  all  of  the  particulars  in 
which  banks  benefit  the  business  community.  As  we 
shall  presently  see,  they  afford  a  convenient  and  valu- 
able means  for  the  interchange  of  information  affecting 
credit;  they  are  useful  to  business  men  of  probity  as 
references ;  they  keep  the  community  supplied  with  con- 
venient "change";  in  many  places  they  afford  the  only 
means  of  safe  deposit  for  valuables ;  and  last,  but  by  no 
means  least,  they  exert  a  tremendous  moral  force  in  be- 
half of  honesty,  truthfulness,  industry,  perseverance, 
thrift,  prudence  and  punctuahty. 


M  THE  UTILITY  OF  BANKING. 

The  Safe-keeping  of  Money. 

In  the  first  place,  banks  are  useful  as  places  of  secur- 
ity for  the  deposit  of  money.  The  circumstances  which 
gave  rise  to  the  business  of  banking  in  England  was  a 
desire  on  the  part  of  the  merchants  of  London  to  obtain 
a  place  where  they  might  lodge  their  money  in  security. 
Every  one  who  has  had  the  care  of  large  sums  of  money 
knows  the  anxiety  which  attends  their  custody.  A  per- 
son in  this  case  must  either  take  care  of  his  money  him- 
self, or  trust  it  to  his  employees.  If  he  takes  care  of  it 
himself,  he  will  often  be  put  to  inconvenience,  and  will 
have  to  deny  himself  holidays  and  comforts,  of  which  a 
man  who  is  possessed  of  much  money  would  not  like  to 
be  deprived.  If  he  intrusts  it  to  others,  he  must  depend 
upon  their  honesty  and  their  ability.  And,  although  in 
many  important  cases  an  employer  is  compelled  to  do 
this,  yet  he  does  not  feel  the  same  satisfaction  as  if  the 
money  was  actually  under  his  own  care.  Some  in- 
stances of  neglect  or  of  dishonesty  will  necessarily  occur, 
and  these  will  occasion  suspicion  in  reference  to  other 
parties  against  whom  no  suspicion  ought  to  be  enter- 
tained. Besides,  in  both  these  cases,  the  money  is  lodged 
in  insecure  premises,  and  is  subject  to  thieves,  to 
fire  and  to  other  contingencies,  against  which  it  is  not 
always  easy  to  guard. 

All  these  evils  are  obviated  by  means  of  banking.  The 
owner  of  money  need  neither  take  the  charge  of  it  him- 
self, nor  trust  to  his  dependents.  He  can  place  it  in  the 
hands  of  his  bankers.  They  are  responsible  men  or  insti- 
tutions and  are  accountable  to  him  for  the  amount.  If 
they  are  robbed,  it  is  no  loss  to  him;  they  are  pledged  to 


THI  UTILITY  OF  BANKING.  95 

restore  to  him  the  amount  of  his  deposit  when  he  shall  re- 
quire it.  Whenever  he  wants  money  he  has  only  to  write 
an  order,  or  check,  upon  his  banker,  and  the  person  to 
whom  he  is  indebted  takes  the  check  to  the  bank,  and 
without  any  hesitation  or  delay  receives  the  money. 

The  Allowance  of  Interest. 

The  bankers  often  allow  interest  for  money  placed  in 
their  hands  on  deposit.  This  is  a  direct  incentive  to 
thrift,  especially  in  the  case  of  depositors  in  savings 
banks. 

By  means  of  banking,  the  various  small  sums  of 
money  which  would  have  remained  unproductive  in  the 
hands  of  individuals,  are  collected  into  large  amounts  in 
the  hands  of  the  bankers,  who  employ  it  in  granting 
facilities  to  trade  and  commerce.  Thus  banking  in- 
creases the  productive  capital  of  the  nation.  At  the 
origin  of  banking,  "the  new-fashioned  bankers,"  as  they 
were  called,  allowed  a  certain  rate  of  interest  for  money 
placed  in  their  hands.  The  banks  of  Scotland  carry  this 
practice  to  the  greatest  extent,  as  they  receive  upon  in- 
terest so  low  an  amount  as  ten  pounds,  and  also  allow  in- 
terest on  the  balance  of  a  running  account.  Many  of  the 
country  bankers  in  England  allow  interest  on  the  balance 
of  a  running  account,  and  charge  commission  on  the 
amount  of  the  money  withdrawn.  The  London  bankers 
generally  do  not  allow  interest  on  deposit,  but  neither  do 
they  charge  commission.  All  their  profits  are  derived 
from  the  use  of  their  customers'  money.  The  banks  of 
Scotland  do  not  charge  commission,  although  they  allow 
interest  on  deposits ;  but  then  those  banks  have  a  profit  by 
th«  issu9  of  their  notss.    The  London  bankers  do  not  is* 


9$  THE  UTILITY  OF  BANKING. 

sue  notes.    The  practice  of  paying  interest  on  general 
deposits  is  becoming  more  common  in  America. 

The  Loaning  of  Money. 

Another  benefit  derived  from  bankers  is,  that  they 
make  advances  to  persons  who  want  to  bor- 
row money.  These  advances  are  made — ^by  discounting 
bills  or  notes — upon  personal  security — upon  the  joint 
security  of  the  borrower  and  two  or  three  of  his  friends — 
and  sometimes  upon  mortgage.  Persons  engaged  in 
trade  and  commerce  are  thus  enabled  to  augment  their 
capital,  and  consequently  their  wealth.  The  increase  of 
money  in  circulation  stimulates  production. 

When  bankers  are  compelled  to  withhold  their  usual 
accommodation,  both  the  commercial  and  the  agricul- 
tural interests  are  plunged  into  extreme  distress. 

The  great  advantage  arising  to  a  neighborhood  from 
the  establishment  of  a  bank,  is  derived  mainly  from  the 
additional  supplies  of  money  advanced  in  the  form  of 
loans,  or  discounts,  to  the  inhabitants  of  the  place. 

The  Transmission  of  Money. 

Another  benefit  derived  from  bankers  is,  that  they 
transmit  money  from  one  part  of  the  country  to  an- 
other. 

There  is  scarcely  a  person  in  business  who  has  not  oc- 
casion sometimes  to  send  money  to  a  distant  town.  But 
how  is  this  to  be  done  ?  He  cannot  send  a  messenger  with 
it  on  purpose — that  would  be  too  expensive.  He  cannot 
send  it  by  mail — that  would  be  too  hazardous.  How, 
then,  is  the  money  to  be  sent?  In  England,  for  example, 
every  country  banker  opens  an  account  with  a  London 
banker.    If,  then,  a  person  lives  in  Bristol  and  wants  to 


TKX  VTULITY  OT  BANKING.  97 

send  a  sum  of  money  to  Aberdeen,  he  will  pay  the  money 
into  the  Bristol  bank,  and  his  friend  will  receive  it  of  the 
Aberdeen  bank.  The  whole  transaction  is  this :  the  Bris- 
tol bank  will  direct  its  agent  in  London  to  pay  the  money 
to  the  London  agent  of  the  Aberdeen  bank,  who  will  be 
duly  advised  of  the  payment.  A  small  commission 
charged  by  the  Bristol  bank,  and  the  postages,  constitute 
all  the  expenses  incurred,  and  there  is  not  the  least  risk  of 


Commercial  travelers,  who  collect  money,  derive  great 
advantage  from  the  banks.  Instead  of  carrying  with 
them,  throughout  the  whole  of  their  journey,  all  the 
money  they  have  received,  when  perhaps  it  may  be 
wanted  at  home,  they  pay  it  into  a  bank,  by  which  it  is 
remitted  with  the  greatest  security,  and  at  little  expense ; 
and  they  are  thus  delivered  from  an  incumbrance  which 
would  have  occasioned  great  care  and  anxiety. 

Exchange  of  Currency. 

Wherever  a  bank  is  established,  the  public  is  able  to 
obtain  that  denomination  of  currency  which  is  best 
adapted  for  carrying  on  the  commercial  operations  of 
the  place.  In  a  town  which  has  no  bank,  a  person  may 
have  occasion  to  use  small  notes,  and  have  none  but  large 
ones ;  and  at  other  times  he  may  have  need  of  large  notes, 
and  not  be  able  to  obtain  them.  But  where  a  bank  is  es- 
tablished there  can  be  no  difficulty  of  this  kind.  The 
banks  issue  that  description  of  notes  which  the  receivers 
may  require,  and  are  always  ready  to  exchange  them  for 
others  of  a  different  denomination. 

Banks,  too,  usually  supply  their  customers  and  the 

neighborhood  with  gold  and  silver  coinage  as  required; 

i.i.L.  v«i.4— y 


■»  TiDI  XTTILITT  OF  BANKINd. 

«nd  If,  on  the  other  hand,  silver  or  gold  should  be  too 
abundant,  the  banks  will  receive  it,  either  as  a  deposit,  or 
in  exchange  for  their  notes.  Hence,  where  banks  are  es- 
tablished, it  is  easy  to  obtain  change.  This  is  very  con- 
venient to  those  who  have  to  pay  large  sums  in  wages,  or 
who  purchase  in  small  amounts  the  commodities  in  which 
they  trade. 

An  Economy  of  Time. 

By  means  of  banking  there  is  a  great  saving  of  time 
in  making  money  transactions.  How  much  longer  time 
does  it  take  to  count  out  a  sum  of  money,  especially  in 
various  European  currencies,  than  it  does  to  write  a 
check.  And  how  much  less  trouble  is  it  to  receive  a 
check  in  payment  of  a  debt,  and  then  to  pay  it  into  the 
banker*s,  than  it  is  to  receive  a  sum  of  money  in  currency. 
What  inconveniences  would  arise  from  the  necessity  of 
weighing  gold  coins  1  What  a  loss  of  time  from  disputes 
as  to  the  goodness  or  badness  of  particular  pieces  of 
money  I 

Besides  the  loss  of  time  that  must  necessarily  occur  on 
every  transaction,  we  must  also  reckon  the  loss  which 
every  merchant  or  tradesman,  in  an  extensive  line  of  bus- 
iness, would  certainly  sustain  in  the  course  of  a  year  from 
receiving  counterfeit  or  deficient  coin,  or  it  may  be,  spur- 
ious notes.  From  all  this  risk  he  is  exempt  by  having 
a  banker.  If  he  receives  payment  of  a  debt,  it  is  in  the 
form  of  a  check  upon  his  customer's  banker.  He  pays  it 
into  his  own  banker's,  and  no  coin  or  bank  notes  pass 
through  his  hands.  If  he  makes  drafts,  those  drafts  are 
presented  by  his  banker:  and  if  his  banker  takes  bad 
money  it  is  his  own  lo§6. 


THE  UTILITY  OF  BANKUfO.  79 

Collection  of  Drafts. 
A  business  man  who  has  a  banker  saves  the  trouble  and 
expense  of  presenting  those  bills  or  drafts  which  he  may 
draw  upon  his  customers,  or  which  he  may  receive  in  ex- 
change for  his  goods.  He  pays  these  into  the  hands  of 
his  banker,  and  has  no  further  trouble.  He  has  no  care 
about  the  custody  of  his  bills  receivable — no  anxiety 
about  their  being  stolen — no  danger  of  forgetting  them 
until  they  are  over-due,  and  thus  exonerating  the  in- 
dorsers — no  trouble  of  sending  to  a  distance  in  order  to 
demand  payment.  He  has  nothing  more  to  do  than  to 
see  the  amount  entered  to  his  credit  in  his  banker's  books. 
If  a  draft  or  note  be  not  paid  it  is  brought  back  to  him  on 
the  day  after  it  falls  due,  properly  noted.  The  banker's 
clerk  and  the  notary's  clerk  are  witnesses  ready  to  come 
forward  to  prove  that  it  has  been  duly  presented,  and 
the  notary's  ticket  attached  to  it  assigns  the  reason  why 
it  is  not  paid. 

This  circumstance  alone  may  cause  an  immense  saving 
of  expense  to  a  mercantile  house  in  the  course  of  a  year. 
Doing  business  through  a  banker  also  prevents  loss  from 
various  kinds  of  mistakes  that  may  be  made  by  the  em- 
ployees of  a  business  house.  In  a  banking-house  mis- 
takes are  not  so  Hkely  to  occur,  though  they  do  occur 
sometimes;  but  the  loss  falls  upon  the  banker,  and  not 
upon  his  customer. 

Still  another  advantage  from  having  a  banker  is,  that 
by  this  means  the  business  man  has  a  continual  referee  as 
to  his  respectability.  If  the  banker  is  applied  to  through 
the  proper  channel,  he  gives  his  testimony  as  to  the  re- 
spectability of  his  customer.    This  may  be  an  immense 


100  THZ  UTILITT  OF  BANKI2C0. 

advantage  to  a  man  in  business,  as  a  means  of  increasing 
his  credit ;  and  credit,  as  Dr.  Franklin  says,  is  money. 

The  keeping  an  account  at  a  banking-house  enables  a 
merchant  not  only  to  give  a  constant  reference  as  to  his 
own  respectability,  but  it  also  enables  him  to  ascertain 
the  respectability  of  other  persons  who  deal  with  bankers. 
There  are  numerous  cases  in  which  a  merchant  may  wish 
to  know  this,  especially  where  such  facilities  as  Dun's  and 
Bradstreet's  reports,  with  which  every  American  busi- 
ness man  is  familiar,  are  lacking. 

Among  nearly  all  the  bankers  in  London,  says  Gil- 
bart,  "the  practice  is  established  of  giving  information 
to  each  other  as  to  the  respectability  of  their  customers. 
For  as  the  bankers  themselves  are  the  greatest  discoun- 
ters of  bills,  it  is  their  interest  to  follow  this  practice; 
and  indeed  the  interest  of  their  customers  also,  of  those 
at  least  who  are  respectable." 

A  Record  of  Expenditures. 

By  means  of  banking,  people  are  able  to  preserve  an 
authentic  record  of  their  annual  expenditure.  If  a  per- 
son pays  in  to  his  banker  all  the  money  he  receives  in  the 
course  of  a  year,  and  makes  all  his  payments  by  checks — 
then  by  looking  over  his  bank-book  at  the  end  of  the  year 
he  will  readily  see  the  total  amount  of  his  receipts,  and 
the  various  items  of  his  expenditure. 

"This  is  very  useful  to  those  who  have  not  acquired 
habits  of  business,  and  who  may  therefore  be  in  danger 
of  living  beyond  their  means.  It  is  useless  to  advise  such 
persons  to  keep  an  account  of  their  expenses — they  will 
do  no  such  thing ;  but  when  short  of  money  at  Christmas 
to  pay  their  bills,  they  may  take  the  trouble  of  looking 


THE  UTILITY  OF  BANKING.  101 

over  their  bank-book,  and  noticing  how  many  checks 
were  drawn  for  the  purchase  of  unnecessary  articles." 

A  bank  account  is  useful  also  in  case  of  disputed  pay- 
ments. People  do  not  always  take  receipts  for  money 
they  pay,  and  when  they  do  the  receipts  may  be  lost  or 
mislaid.  In  case  of  death,  or  of  omission  to  enter  the 
amount  in  the  creditor's  books,  the  money  may  be  de- 
manded again.  Should  the  payment  have  been  made  in 
currency,  the  payer  can  oflPer  no  legal  proof  of  having 
settled  the  account ;  but  if  the  account  was  discharged  by 
a  check  on  a  banker,  the  check  itself  can  be  produced,  and 
the  payment  proved  by  the  officers  of  the  bank,  who  can 
be  subpcensed  for  that  purpose. 

Safe  Deposit  for  Valuables. 

Another  advantage  resulting  from  a  banker  in  many 
places  that  lack  safe  deposit  vaults  is,  that  the  customer 
has  a  secure  place  of  deposit  for  any  deeds,  papers,  or 
other  property  that  may  require  peculiar  care.  If  a 
party  were  going  to  the  country  he  might  send  his  plate 
or  jewelry  to  his  banker,  who  will  lock  it  up  in  his  strong 
room,  and  thus  it  will  be  preserved  from  fire  and  thieves 
imtil  his  return.  European  lawyers,  stockbrokers,  and 
others,  who  have  deeds,  securities  or  other  documents  of 
importance  left  in  their  custody,  can  send  them  to  the 
bank  during  the  night,  and  thus  avoid  the  danger  of  fire. 
In  America,  safety  deposit  vaults  are  now  found  in  every 
city  of  importance,  often  operated  in  connection  with 
banks.  In  the  smaller  cities,  towns  and  villages,  the 
banker  is  a  universal  custodian  of  valuables  for  his  de- 
positors. 


102  THE  UTILITY  OF  BANKING. 

Valuable  Help  in  Business. 
By  having  a  banker,  people  have  a  ready  channel  of 
obtaining  much  information  that  will  be  useful  to  them 
in  the  way  of  their  business.  They  will  learn  the  way  in 
which  bankers  keep  thfir  accounts ;  and  may  learn  many 
of  the  laws  and  customs  relating  to  negotiable  paper. 
They  may  obtain  assistance  in  remitting  money  to  dis- 
tant places  and  so  save  themselves  trouble  and  possible 
loss.  If  they  have  to  buy  or  sell  bonds,  stocks,  or  shares 
the  banker  can  send  them  to  a  respectable  broker,  who 
can  manage  the  business;  or  should  they  be  about  to 
travel,  and  wish  to  know  the  best  way  of  receiving  money 
abroad ;  or  be  appointed  executors  to  a  will,  and  have  to 
settle  money  matters — the  banker  will  in  these  and 
many  other  cases,  be  able  to  give  them  the  necessary  in- 
formation. 

A  Moral  Influence  for  Good. 

Banking  also  exercises  a  powerful  influence  upon  the 
morals  of  society.  It  tends  to  produce  honesty  and 
punctuality  in  pecuniary  engagements.  Bankers,  for 
their  own  interest,  always  have  a  regard  to  the  moral 
character  of  the  party  with  whom  they  deal ;  they  inquire 
whether  he  be  honest  or  tricky,  industrious  or  idle,  pru- 
dent or  speculative,  thrifty  or  extravagant,  and  they  will 
more  readily  make  advances  to  a  man  of  moderate  prop- 
erty and  good  morals  than  to  a  man  of  large  property 
but  of  inferior  reputation. 

Thus  the  establishment  of  a  bank  in  any  place  imme- 
diately  advances  the  pecuniary  value  of  a  good  moral 
character.  There  are  numerous  instances  of  persons 
having  risen  from  obscurity  to  wealth  only  by  means  of 


THE  UTILITY  OF  BANKING.  lOd 

their  moral  character,  and  the  confidence  which  that  char- 
acter produced  in  the  mind  of  their  banker.  It  is  not 
merely  by  way  of  loan  or  discount  that  a  banker  serves 
such  a  person.  He  also  speaks  well  of  him  to  those  per- 
sons who  may  make  inquiries  respecting  him  and  the 
banker's  good  opinion  will  be  the  means  of  procuring 
him  a  higher  degree  of  credit  with  the  parties  with  whom 
he  trades. 

These  effects  are  easily  perceivable  in  country  towns ; 
and  even  in  great  cities,  if  a  house  be  known  to  have  en- 
gaged in  speculative  transactions,  or  in  any  other  way  to 
have  acted  questionably,  their  paper  will  be  taken  by  the 
bankers  less  readily  than  that  of  a  strictly  reputable 
house  of  inferior  property. 

It  is  thus  that  bankers  perform  the  functions  of  pub- 
lic conservators  of  the  commercial  virtues.  From  mo- 
tives of  private  interest  they  encourage  the  industrious, 
the  prudent,  the  punctual,  and  the  honest — while  they 
discountenance  the  spendthrift  and  the  gambler,  the  liar 
and  the  knave.  They  hold  out  inducements  to  upright- 
ness, which  are  not  disregarded  by  even  the  most  aban- 
doned. There  is  many  a  man,  says  Gilbart,  truly,  who 
would  be  deterred  from  dishonesty  by  the  frown  of  a 
banker,  though  he  might  care  but  little  for  the  admoni- 
tions of  a  bishop. 


"Whether  it  is  your  form  of  organization  and  total  of 
bills  receivable,  or  the  time  you  arrive  at  the  office  and 
the  church  you  attend — every  fact  counts  with  the  bank. 
The  answer  to  what  it  wants  to  know  is — everjrthing.** 


CHAPTER  VI. 
THE  METHODS  OF  BANKING. 

BY  SEYMOUR  EATON. 

Banks  are  absolutely  necessary  to  the  success  of  mod- 
ern commercial  enterprises.  They  provide  a  place  for 
the  safe-keeping  of  money  and  securities,  and  they  make 
the  payment  of  bills  much  more  convenient  than  if  cur- 
rency instead  of  checks  were  the  more  largely  used. 
But  the  great  advantage  of  a  banking  institution  to 
a  business  man  is  the  opportunity  it  affords  him  of  bor- 
rowing money,  of  securing  the  cash  for  the  carrying 
on  of  his  business,  while  his  own  capital  is  locked  up  in 
merchandise  or  in  the  hands  of  his  debtors.  Another 
and  important  advantage  is  to  be  found  in  the  facilities 
afforded  by  banks  for  the  collection  of  checks,  notes,  and 
drafts. 

Currency. 

The  legal  medium  of  exchange  of  a  country  is  called 
its  currency,  that  which  passes  current,  or  circulates  as 
money,  such  as  coin  and  bills.  Bullion  is  uncoined  gold 
or  silver.  More  than  ninety  per  cent  of  the  cash  circu- 
lation of  the  country  is  represented  by  checks,  etc.,  and 
not  by  actual  money. 

Organization  of  Banks. 
The  national  banks  are  organized  under  national  laws 
while  state  banks,  savings  banks,  etc.,  are  organized 
imder  the  laws  of  the  State  in  which  they  are  located. 

10« 


106  THE  METHODS  OF  BANKING. 

Any  person  who  has  money  and  credit  can  start  a 
private  bank.  Some  of  the  largest  banking  institutions 
of  the  world  are  owned  by  private  individuals,  and  are 
not  subject  to  law  any  more  than  is  any  other  kind  of 
business  concern. 

The  act  of  Congress  of  1864  fixes  the  corporate  life 
of  a  national  banking  association  at  twenty  years.  Un- 
der date  of  July  12,  1882,  an  act  was  passed  authoriz- 
ing extensions  for  an  additional  period  of  twenty  years, 
and  second  extensions  were  authorized  by  the  act  of 
April  12,  1902.  From  1882  to  October  31,  1909,  first 
extensions  of  charters  were  granted  to  2,795  banks  and 
under  the  act  of  1902  to  969  banks. 

Section  5133  of  the  Revised  Statutes,  formerly  section 
5  of  the  act  of  June  3,  1864,  provides  for  the  organi- 
zation of  national  banking  associations  by  any  number 
of  natural  persons  not  less  than  five.  The  law  con- 
fers authority  upon  the  Comptroller  of  the  Currency 
to  approve  the  corporate  title  of  an  association  and  also 
to  withhold  his  certificate  authorizing  an  association  to 
begin  business  when,  as  the  result  of  special  examina- 
tion or  otherwise,  it  is  ascertained  that  the  association 
has  been  organized  for  purposes  other  than  those  con- 
templated by  the  act.  It  is  further  provided  that  no 
banks  shall  be  organized  with  capital  less  than  $100,000 
unless  sanctioned  by  the  Secretary  of  the  Treasury.  This 
was  reduced  to  $25,000  in  certain  cases,  in  1900. 

To  avoid  formation  of  associations  for  ulterior  pur- 
poses or  by  those  lacking  the  qualifications  necessary  to 
successful  conduct  of  the  banking  business,  or  in  a  place 
the  population  and  business  of  which  are  insufficient  to 


THE   METHODS  OF  BANKING.  107 

warrant  the  establishment  of  a  national  bank,  the  Comp- 
troller, upon  receipt  of  an  application  to  organize,  causes 
a  special  investigation  to  be  made,  the  results  of  which 
determine  the  favorable  or  unfavorable  action. 

The  expansion  of  the  national  banking  system  along 
normal,  safe,  and  conservative  lines  is  unquestionably  de- 
sirable, but  the  Comptroller  of  the  Currency  takes  the 
view  that  the  organization  of  a  bank  is  not  warranted  in 
a,  community  where  there  is  no  reason  for  its  existence; 
that  is,  where  sufficient  business  would  not  naturally 
come  to  warrant  success,  or  where  the  board  of  directors 
will  not  be  composed  of  men  of  business  ability  equal 
to  the  best  to  be  found  in  the  community,  or  where  the 
organization  is  attempted  by  promoters  who,  by  public 
and  private  means,  create  a  false  impression  that  a  bank 
is  needed  and  that  success  is  assured  by  merely  obtain- 
ing subscriptions  to  the  capital  stock.  Comparatively 
few  applications  for  authority  to  organize  national  banks 
are  rejected,  however. 

From  the  date  of  the  establishment  of  the  national 
banking  system  in  1864  to  October  31,  1909,  charters 
were  granted  to  9,572  national  banking  associations, 
of  which  2,063  have  been  placed  in  voluntary  liquidation 
and  484  failed.  The  number  of  banks  in  operation  at 
the  close  of  the  year  1909  was  7,025.  Included  in  the 
9,572  associations  chartered  are  1,503  banks,  with  orig- 
inal capital  of  $320,755,928,  which  were  conversions  of 
state  banks. 

Since  March  14,  1900,  the  date  of  the  act  of  Congress 
authorizing  the  organization  of  banks  with  capital  of 
$25,000,  charters  have  been  granted  to  4,308  associations. 


108  '  THE  METHODS  OF  BANKING. 

with  capital  of  $261,083,300,  a  number  greater  by  691 
than  the  number  of  banks  in  existence  on  the  date  of 
the  passage  of  the  act  in  question.  The  number  of 
banks  organized  during  this  period  (1900  to  1909)  in- 
cludes 2,768,  with  capital  of  $72,105,500,  which  were  or- 
ganized under  the  act  of  March  14,  1900,  and  1,540, 
with  capital  of  $188,977,800,  organized  under  the  act  of 
1864  with  yidividual  capital  of  $50,000  or  over. 

The  Officers  of  a  Bank. 

The  directors  of  a  bank  meet  regularly  to  consider  the 
character  of  the  paper  offered  for  discount,  and  to  consult 
regarding  the  general  business  of  the  bank.  Sometimes 
the  directors  give  the  president  or  cashier  authority  to 
pass  upon  paper  offered  for  discount. 

The  ordinary  officers  of  a  bank  are  the  President,  who 
is  the  chief  executive  officer;  the  Cashier,  who  is  the 
manager  of  the  internal  workings  of  the  bank ;  the  Pay- 
ing Teller,  who  pays  out  all  moneys  and  has  charge  of 
the  working  cash  of  the  bank;  he  is  familiar  with  the 
signature  of  each  depositor  and  with  his  daily  balance, 
and  is  really  one  of  the  most  important  officers  of  the 
bank.  The  Paying  Teller  should  be  a  man  of  good 
ability,  a  man  who  can  read  motives  from  appearances,  a 
man  of  quick  and  accurate  judgment,  and  withal,  a  man 
of  patience  and  unwavering  good  nature.  The  Receiv- 
ing Teller  receives  all  moneys  coming  into  the  bank,  and 
makes  the  entries  in  the  depositors'  pass  books.  The 
Note  Clerk  has  charge  of  the  commercial  paper  handled. 
The  Bookkeeper  and  his  assistants  have  charge  of  the 
ledgers  and  other  account  books. 


METHODS  or   BANKJNa.  109 

Suggestions  to  Bank  Clerks. 

Ability,  enthusiasm,  tact  and  determination  are  as  nec- 
cessary  in  banking  as  in  any  other  commercial  situations. 
Many  of  the  most  successful  bankers  in  the  country 
commenced  as  messengers  and  passed  from  one  office  to 
another  until  they  became  presidents.  It  should  be 
the  constant  endeavor  of  officers  of  a  bank  who  hold 
superior  positions  to  cultivate  and  develop  the  self-re- 
spect of  their  subordinates.  Faithful  service  and  manly 
character  in  a  janitor  are  entitled  to  just  as  much  honor 
and  to  as  full  recognition  as  that  rendered  by  a  cashier. 
The  man  makes  the  place,  not  the  place  the  man. 

It  is  the  general  opinion  of  bankers  that  the  demand 
for  the  right  sort  of  bank-clerk  is  much  in  excess  of  the 
supply.  No  young  man,  however,  should  think  of  en- 
tering upon  banking  as  a  profession,  unless  he  has  a 
real  love  for  the  business. 

The  best  position  for  a  young  man,  and  the  one 
affording  the  largest  opportunity  for  promotion  will  be 
that  of  general  assistant.  It  is  considered  better  to  en- 
ter upon  a  clerkship  in  a  small  bank  than  in  a  very  large 
one,  for  the  reason  that  the  steps  in  the  ladder  of  suc- 
cess are  fewer  and  closer. 

The  successful  clerk  must  have  a  true  appreciation 
of  the  value  of  time.  Every  minute  should  be  strictly 
given  to  the  work  of  the  bank.  In  the  matter  of  prompt- 
ness the  higher  officers  should  set  a  good  example  for 
those  in  subordinate  positions.  There  are  exceptions, 
but  as  a  rule  promotions  are  not  the  result  of  chance. 
The  man  in  any  calling  who  has  the  abiUty  and  the  desire 
to  do  greater  things  will  sooner  or  later  be  called  upon 
to  do  them. 


119  IflK   ACZTMCnM   OF    BANKJLNG. 

The  Bank's  Cash. 

The  actual  usable  cash  of  a  bank  is  represented  by 
the  silver,  gold  and  bills  on  deposit. 

It  is  estimated  that  the  gold  in  use  in  the  world 
amounts  to  $7,000,000,000,  and  that  an  equal  amount 
has  been  lost  through  wear  and  other  causes  since  the 
earliest  times.  A  million  dollars  in  gold  could  be  put 
into  a  box  two  feet  square  and  a  foot  deep.  All  the  gold 
in  the  world  could-be  put  into  a  room  64  feet  by  50  feet 
with  a  height  of  20  feet.  It  is  estimated  that  a  million 
dollars  worth  of  gold  is  each  year  buried  in  the  ceme- 
teries of  the  United  States  in  the  mouths  of  the  dead. 

The  gold  in  our  banks  lies  piled  in  bags  containing 
$5,000  each.  Each  bag  weighs  twenty-two  pounds. 
Standard  gold  is  worth  $18.96  an  ounce,  and  a  $20  gold 
piece  weighs  21%  pennyweights.  In  shipping  gold 
from  New  York  to  London  it  is  estimated  that  a  million 
dollars  in  gold  may  be  reduced  in  value,  by  the  coins 
rubbing  against  each  other,  about  $175. 

If  a  standard  gold  coin  falls  short  one-half  of  one 
per  cent,  of  its  original  standard  weight,  it  is  marked 
"light  weight"  the  moment  it  reaches  the  United  States 
Treasurer.    It  then  ceases  to  travel  as  money. 

The  United  States  bills  which  are  considered  cash  are 
of  a  variety  of  kinds.  There  are  in  circulation  over 
$300,000,000  of  treasury  notes  of  the  following  denom- 
inations: $1,  $2,  $5,  $10,  $50,  $100,  $500,  $1000. 
These  arc  payable  in  coin,  either  gold  or  silver. 

The  national  bank  notes  are  really  promissory  notes, 
issued  by  the  banks,  and  payable  on  demand.  They 
are  secured  by,  and  issued  upon.  United  States  bonds. 


THS  METHODS  OV  BANKINO.  Ill 

Every  national  bank  must  redeem  its  notes  in  full  in 
lawful  money  at  the  treasury  in  Washington  or  over  its 
own  counter  whenever  a  demand  for  payment  is  made. 
The  denominations  of  the  national  bank  notes  are  the 
same  as  those  of  the  Treasury  notes,  except  that  there 
are  no  bills  smaller  than  $5. 

The  silver  certificates  are  notes  issued  by  the  United 
States  government  and  payable  on  demand  in  silver 
dollars.  Some  hunHreds  of  millions  of  dollars  of  this 
form  of  money  are  now  in  circulation. 

Notwithstanding  the  fact  that  the  paper  used  is  of  the 
very  best  quality,  paper  money,  the  world  over,  is  con- 
stantly becoming  ragged  and  mutilated. 

It  may  be  well  to  quote  here  the  law  which  regulates 
the  redemption  of  mutilated  bills.  If  the  whole  face 
of  a  note  is  in  a  condition  which  will  permit  its  being 
recognized  as  a  genuine  bill  it  will  be  paid  in  full.  If 
not  more  than  two-fifths  of  the  paper  of  a  national 
bank  note  is  gone  and  the  note  shows  the  name  of  the 
bank  and  the  signature  of  one  of  its  officers,  it  will  be 
paid  in  full. 

United  States  notes,  Treasury  notes  of  1890,  fractional-currency 
notes,  gold  certificates,  silver  certificates,  and  national-bank  notes, 
when  mutilated  so  that  less  than  three-fifths,  but  clearly  more  than 
two-fifths,  of  the  original  proportions  remains,  are  redeemable  by 
the  Treasurer  only,  at  one-half  the  face  value  of  the  whole  note  or 
certificate.  Fragments  not  clearly  more  than  two-fifths  are  not  re- 
deemed, unless  accompanied  by  a  satisfactory  affidavit. 

Fragments  less  than  three-fifths  are  redeemed  at  the  face  value 
of  the  whole  note  when  accompanied  by  an  affidavit  of  the  owner  or 
other  person  having  knowledge  of  the  f«at«  tlu.t  the  miMing  portiona 
have  been  totally  destroyed. 


118  THS    METHODS    OF    BANSI2f«. 

Counterfeit  Notes. 

All  United  States  notes  are  printed  in  sheets  of  four 
notes  of  one  denomination  on  each  sheet.  Each  note  is 
lettered  and  numbered  twice.  All  notes  of  which  the 
number  when  divided  by  4,  shows  remainder  of  one,  have 
the  check  letter  A;  a  remainder  of  2,  the  check  letter  B; 
a  remainder  of  3,  the  check  letter  C ;  those  numbers  which 
divided  by  4 /show  no  remainder,  have  the  check  letter 
D.  Any  United  States  note  the  number  of  which  can- 
not be  divided  by  4  and  show  one  of  the  foregoing  re- 
sults is  a  counterfeit. 

There  are  no  secrets  in  the  art  of  detecting  counter- 
feits. Careful  study,  long  experience,  and  a  thorough 
familiarity  with  all  kinds  of  genuine  bills,  will  make  any 
person  an  expert.  Banks  are  required  by  law  to  stamp 
as  "Counterfeit"  all  had  hills  coming  into  their  posses- 
sion. 

Bank  Loans. 

A  portion  of  the  loans  of  many  banks  consists  of  in- 
vestments in  solid  bonds,  but  the  bulk  of  the  loans  of 
banks  are  made  on  commercial  paper ;  time  and  demand 
loans  are  made  upon  collaterals  of  many  descriptions. 
The  larger  banks  loan,  on  an  average,  from  fifty  to  one 
hundred  thousand  dollars  a  day.  A  very  large  propor- 
tion of  the  commercial  paper  discounted  is  first  handled 
by  note  brokers. 

Banks  discount  paper  for  their  depositors — and  simp- 
ly term  the  operation  discounting;  but  when  they  go 
outside  of  their  line  of  depositors,  in  making  investments 
in  time  paper,  they  call  it  buying  paper.  They  gener- 
ally buy  from  private  bankers  and  note  brokers. 


Torn  lorrsBODt  of  ban  kins.  118 

National  banks  are  prohibited  from  loaning  over  ten 
per  cent,  of  their  capital  to  any  one  individual  or  cor- 
poration, except  upon  paper  representing  actually  ex- 
isting merchandise. 

Accurate  Interest. 
The  Treasury  Department  at  Washington  pays  ac- 
curate interest,  founded  on  a  basis  of  365  days  to  the 
year.    The  great  majority  of  banks  pay  and  charge  in- 
terest on  a  basis  of  360  days  to  the  year. 

Money  "On  CaU." 
National  banks  located  in  clearing-house  centers,  find 
it  a  very  convenient  thing  to  put  out  quite  a  percentage 
of  their  loans  on  call.  In  some  cities  banks  have  a  habit 
of  borrowing  on  call  from  each  other  at  clearing-house 
icttlements.  Call  loans  are  payable  on  demand  and  are 
•ccured  by  demand  notes.  , 

Collaterals. 
If  a  business  man  borrow  $1,000  from  a  bank  on  his 
note  and  give  ten  shares  of  stock  to  the  bank  to  be  held 
by  it  simply  as  security,  the  stock  thus  given  would  be 
termed  collateral.  These  collaterals  are  not  the  bank's 
property,  and  the  bank  is  responsible  for  their  safe-keep- 
ing. If  coupons  mature  while  bonds  are  being  held  as 
collateral,  the  owners  are  usually  allowed  to  collect  the 
amount  for  which  they  sell.  Sometimes  one  note  is  given 
as  collateral  security  for  another  which  is  discounted. 

The  Name  "Bank." 
In  some  of  the  states  the  title  Bank  can  be  lawfully 
used  by  anyone ;  in  other  states,  for  instance,  New  York 
and  Massaehus^tts,  th«  titl«  Bunk  can  be  used  only  by 


114  THE  METHODS  OF  BANKING. 

duly  incorporated  banks  which  are  organized  and  con- 
ducted under  the  provisions  and  restrictions  of  the  state 
banking  laws. 

Borrowing  from  Banks. 

It  is  the  business  of  a  bank  to  loan  money  to  re- 
sponsible persons,  within  reasonable  limits.  The  regu- 
lar customer  of  the  bank  is  entitled  to  and  will  receive 
the  first  consideration  if  the  demand  is  larger  than  the 
bank  can  safely  meet. 

A  business  man  should  not  hesitate,  when  occasion  re- 
quires, to  offer  his  bank  any  paper  he  may  want  dis- 
counted, if  in  his  opinion  it  is  good,  nor  should  he 
be  offended  if  his  banker  refuses  to  take  it,  even  with- 
out giving  reasons. 

Make  your  own  notes  and  acceptances  payable  at  your 
bank.  Keep  a  careful  record  of  the  dates  of  maturity  of 
all  paper  which  you  make  or  indorse.  It  is  usually 
better,  that  is,  more  convenient  to  the  holder,  to  pay  your 
note  early  on  the  day  it  falls  due,  rather  than  a  day  or 
two  before. 

Rates  for  Loans. 

In  loaning  money  on  demand,  when  it  is  strictly  un- 
derstood between  bank  and  borrower  that  the  money 
so  advanced  is  positively  minute  money — ^money  return- 
able at  any  minute,  when  the  bank  calls  for  it — banks 
usually  charge  low  rates  of  interest.  When  interest 
rates  are  high,  bankers  prefer  to  deal  in  long-time  paper. 
This  general  rule  is  reversed  when  the  situation  is  re- 
versed 

Bankers  aim  also  to  scatter  and  locate  their  maturi- 
ties so  that  as  the  seasons  roll  around,  they  will  not  have 


THE  METHODS  OF  BANKING.  115 

very  large  amounts  maturing  at  one  time  and  very  small 
amounts  at  another.  They  plan  also  to  be  "in  funds"  at 
those  seasons  when  there  is  always  a  large  and  profitable 
demand  for  money.  For  instance  in  the  centers  of  the 
cotton  manufacturing  interest  the  banks  count  on  a  large 
demand  for  money  between  October  and  January  when 
the  bulk  of  the  purchases  to  supply  the  mills  are  made: 
again,  among  those  who  operate  and  deal  in  wool  there 
is  an  active  demand  for  money  in  the  wool  clip  in  the 
spring  months.  The  wheat  and  corn  crops  are  autumn 
consumers  of  money.  Midwinter  and  midsummer  in  the 
north  are  usually  periods  of  comparative  stagnation  in 
the  money  market. 

All  these  things  affect  rates,  and  the  successful  banker 
is  he  who  from  observation  and  large  experience  shows 
the  most  skill  in  timing  his  money  supply. 

When  Interest  Accrues. 

There  are  certain  well-defined  principles  which  make 
clear  when  interest  is  accruing  and  when  it  is  not. 
Money  voluntarily  left  by  any  one  in  the  hands  of  an- 
other will  not,  of  course,  draw  interest  unless  a  specific 
mutual  agreement  to  that  effect  is  made.  In  most  cases, 
a  demand  note  bears  interest  even  though  there  be  no 
statement  to  this  effect  on  the  face  of  the  note. 

Money  on  deposit  in  a  bank  without  an  agreement  to 
pay  interest  will  not  accumulate  interest  even  though 
it  remain  fifty  years. 

Forged  Indorsements. 

A  bank  is  supposed  to  know  the  signatures  of  its  de- 
positors.   It  is  one  of  its  first  and  most  important  duties 


lltf  THX  ifttCETHODI  OF  BANKING. 

to  have  them  on  file  and  immediately  accessible  by  the 
use  of  a  well-kept  signature  book. 

Holders  of  checks,  in  very  many  cases,  know  nothing 
about  these  drawer-signatures.  They  have  taken  them, 
supposing,  of  course,  that  they  are  genuine.  When 
they  have  collected  the  checks  at  the  banks  upon  which 
they  are  drawn  they  are  to  a  very  great  extent  reheved 
of  all  further  responsibiUty  as  to  the  signatures  of  the 
signers,  for  the  bank  by  paying  them  has  guaranteed 
their  genuineness. 

But  the  bank  which  cashes  for  a  good  holder  a  much- 
indorsed  check,  the  signature  of  which  is  all  right,  gen- 
erally knows  nothing  about  its  many  indorsements  be- 
yond the  fact  that  they  seem  to  be  all  right  and  stand 
there  in  regular  order,  apparently  correctly  made.  For 
the  honesty  and  genuineness  of  these  many  or  few  pre- 
ceding indorsements  the  last  holder,  for  whom  the  check 
is  cashed,  whether  he  indorse  the  check  or  not,  is  fully 
and  legally  held,  and  no  reasonable  lapse  of  time  before 
a  discovery  of  the  forgery  is  mad6  will  reheve  him  of 
this  hability. 

Trust  Companies. 

The  ordinary  trust  company  with  which  city  people 
are  familiar  is  very  similar  in  its  management  to  a  na- 
tional bank.  They  invest  their  deposits  and  capital  in 
the  same  class  of  securities,  and  they  are  equally  careful 
and  conservative  in  the  matter  of  their  loans.  They  re- 
ceive money  on  deposit  subject  to  checks  and  allow  in- 
terest on  deposits  which  exceed  a  nominal  sum — ^usually 
from  $300  to  $1,000.  They  are  organized  under  and 
ax«  subject  te  stata  laws.     Tk«y  hav«  ooiuiaction  with 


Tta  KITHODI  07  BiiNKINCI.  117 

the  clearing-houses  either  direct  or  through  some  con- 
venient national  bank. 

Trust  companies  are  in  form  of  organization  very 
similiar  to  the  great  joint-stock  banks  of  England. 
They  are  usually  authorized  to  receive  and  hold  moneys 
and  property  in  trust  and  on  deposit  from  courts  of  law 
or  equity,  executors,  administrators,  assignees,  guardians, 
trustees,  corporations,  and  individuals,  and  may  be  ap- 
pointed by  probate  courts  trustees  under  any  will,  upon 
such  terms  and  conditions  as  may  be  agreed  upon.  They 
act  as  trustees  for  widows  or  children,  take  charge  of 
and  manage  property,  and  collect  interest  and  rent. 
They  act  as  transfer  agents  for  railroad  and  other  stock, 
and  as  agents  for  the  purpose  of  issuing,  registering,  or 
countersigning  the  certificates  of  stock,  bonds,  or  other 
evidences  of  debt,  and  for  the  payment  of  dividends. 
They  act  as  agents  or  attorneys  for  the  care  and  manage- 
ment of  invested  property. 

Safe  Deposit  Vaults. 

Many  of  the  banks,  trust  companies,  and  insurance 
companies  make  a  special  feature  of  renting  small  safe 
deposit  boxes  or  drawers  in  their  vaults  to  any  and  every 
person  who  chooses  to  pay  the  rent  asked,  which  depends 
largely  on  the  amount  of  space  needed  and  is  usually 
from  $3  to  $10  for  the  smallest  sized  box.  It  is  very 
convenient  for  one  who  has  not  a  safe  of  his  own  to  have 
a  secure  place  in  which  to  keep  valuable  papers. 

In  many  of  the  larger  safe  deposit  vaults  there  are 
desks  and  stationery  for  customers,  so  that  one  may  at 
any  time  and  very  conveniently  and  privately  examine 
one's  papers  and  make  entries  or  indorsements,  or  add 
new  vouchers,  or  make  chang^es,  as  the  occasion  may  re- 
quire. 


118  THE  METHODS  OF  BANKING. 

A  Depositor's  Credit. 
As  a  rule,  banks  do  not  make  known  even  to  a  single 
individual  the  extent  of  a  customer's  business  or  the  size 
of  his  bank  account.  However,  any  shareholder  in  a  bank 
has  a  right,  as  one  of  the  proprietors,  to  examine  the 
books,  so  long  as  such  examination  is  not  an  unreason- 
able interference  with  the  regular  routine  of  work,  and 
it  is  pretty  generally  known  that  a  large  depositor  can 
either  directly  or  through  some  other  bank  get  at  the 
condition  of  a  small  depositor's  account. 

Giving  Bonds  for  Faithful  Service. 

Bank  clerks  and  officers  are  usually  required  to  give 
bonds,  that  is,  they  must  get  some  person  to  go  their 
surety,  thus  guaranteeing  faithful  service,  and  agreeing 
to  make  good  any  losses  caused  by  defalcation  or  careless- 
ness. There  are  now  several  surety  companies  that  give 
bonds  for  everyone  and  anyone  whom  they  consider  a 
"good  risk"  upon  the  payment  of  certain  premiums  as 
in  insurance. 

If  a  young  man  is  an  applicant,  say,  for  a  cashier's 
position  in  a  mercantile  house  and  the  house  requires  that 
some  one  give  a  bond,  that  is,  go  his  surety  for  $10,000, 
and  the  young  man  has  no  rich  father  or  uncle  to  guar- 
antee the  house  against  loss,  he  applies  to  a  bond  insur- 
ance company  and  if  his  record  and  habits  are  good  he 
has  no  difficulty  in  securing  the  necessary  papers. 

The  amount  of  the  bond  required  depends  upon  the 
importance  of  the  position  applied  for.  Presidents  of 
banks  do  not  usually  give  bonds. 

The  bonds  of  personal  friends  have  always  a  good 
deal  of  moral  weight  and  force  and  for  this  reason  are 


THE  METHODS  OF  BANKING. 


119 


Enow  all  Men  by  these  B:e9eiit^ 

That  vT^f...^i2ir'en4.y  9^-M»*»,„.je  princip^L  and  i*."J2»«*<tf 
^a4.t....xM*J  i2l^<ytu^  ^:»^Ha9n.^^Zi  8uretic8»  ate  bokko 
and  stand  firmly  bound  unto  \ 

The  Royal  Eicbange  Ml,  of  New  York, 

in  the  sum  of.....^ ^.^^/^&f  G^^**s<it%tc ^.„.^...'.dolIan 

to  be  paid  unto  the  said '~^<^ya.^  S<ce4t»n^  ^&i»m^^.... 

Whereas,  the  said  ^..i2!(r&ii4,y  <<e4a-un».,.Jtias  been  6x1^ 

appointed  to  the  office  of '^&in<tA<^..^..ot  the  bank  aforesaid,  by 

the  Directors  thereof,  and  has  signified  his  acceptance  of  the  said 
appointment: 

Now  the  condition  of  this  Obligation  Is  such.  That  If 

the  said iZlre^tty  <^i^^4t9t. shall  faithfully  discharge  the 

duties  of  his  said  office  and  all  other  duties  that  are.  or  may  here- 
after be,  prescribed  by  the  President  and  Directors,  for  and  during 
the  term  for  which  he  has  been  s^  eletited.  and  for  and  during  such 
term  of  time  as  he  may  continue  therein,  by  any  re-election  or 
otherwise,  then  this  obligation  shall  be  void,  but  otherwise  shall  re- 
main in  full  force 

It  is,  however,  understood,  that  In  case  of  the  death  of  Either 
of  the  above-named  sureties,  or  in  case  either  of  the  above-named 
sureties  shall  at  any  time  give  notice  in  writiog,  to  the  President  or 
Directors,  for  the  time  being  that  he  does  not  wish  to  be  held  any 
longer  responsible  on  this  obligation,  thereupon  both  of  the  above- 
named  sureties  shall  be  discharged  from  liability  on  account  of  any 
default  of  the  said  principal  which  may  occur  after  thirty  days  from 
and  after  the  notice  of  such  death,  or  of  such  wish  to  be  dischargedl 
as  aforesaid. 

Signed  and  sealed  in  the  presence  of 


\^/a^.QL</ 


nntnesses: 


V^.<^.^<H 


.(Sm.) 

QuM«t  <&4t..^  .(SXAI.) 


A  Form  of  Siirety  Bond. 

considered  superior  to  the  bonds  granted  by  a  guaran- 
tee company.  Such  a  bond  is  really  a  testimonial,  and 
the  last  one  that  is  likely  to  be  violated.  The  record 
shows  that  marvelously  few  employees  have  violated 
such  bonds. 


120  THE  METHODS  0*  BJLKKOra. 

The  guarantee  companies  look  into  a  man's  standing 
very  thoroughly  before  taking  the  risk  of  becoming  his 
surety.  When  an  application  is  made  three  references 
are  given  and  the  company  corresponds  with  the  per- 
sons whose  names  are  given  as  references  and  asks  a 
great  many  very  pointed  questions.  A  young  man  with 
good  social  standing  can  secure  bonds  for  five  or  ten 
thousand  dollars  by  the  paymerit  of  a  small  annual 
premium. 

Use  of  Instruments  of  Credit. 

All  the  wholesale  transactions  of  business  and  a  large 
part  of  the  retail  transactions  are  completed  by  the  pass- 
ing of  instruments  of  credit  or  negotiable  paper,  as  notes, 
drafts,  checks,  etc. ;  a  part  of  the  retail  trade  only  is  con- 
ducted by  what  is  called  cash,  that  is,  actual  bills  and 
small  change.  It  is  the  function  of  banks  to  deal  with 
these  transferable  instruments  legally  called  titles. 

Banks  deal  to  a  very  small  extent  in  actual  money. 
The  notes,  drafts,  biUs  of  exchange  and  bank  deposits 
are  representative  of  the  property  passing  by  title  in 
money  from  the  producers  to  the  consumers.  A  small 
proportion,  perhaps  six  or  eight  per  cent.,  of  these  tran- 
sactions is  conducted  by  the  use  of  actual  bank  or  legal 
tender  notes. 

This  trade  in  instruments  of  credit  amounts  to  some- 
thing like  fifty  billions  of  dollars  yearly.  The  losses 
through  mercantile  failures  rarely  exceed  one  hundred 
millions  a  year,  that  is  one  dollar  in  every  five  hundred, 
or  one-fifth  of  one  per  cent  of  the  groat  ^;pt^^^^  o^  buM- 
ness. 


THE   METHODS  OF  BANKI!»8. 


121 


Emergency  Currency. 
Some  samples  are  given  here  of  the  emergency  cur- 
rency of  1893,  which  may  be  taken  as  an  example  of  a 
period  of  financial  stringency.  Beginning  in  August  and 


Emergency  Currency  of  1893. 


I 

Mil*. 

1! 


BUFPALOk. 


mi. 


$5. 

...1352     MARINE  BANK 

Pay  to  Bearer  FIVE  DOLLARS  througli  the  Bitf- 
falo  Clearing  House  and  charge  to  pay-roH  account  of 


within  a  single  month  a  currency  famine  due  to  a  variety 
of  causes  became  general.  The  banks  ceased  to  loan 
money,  many  of  them  fearing  "a  run."  Interest  reached 
20,  50,  and  100  per  cent.  The  banks  of  one  city  refused 
to  accept  drafts  on  another.  Some  hundreds  of  banks 
were  compelled  to  close  their  doors.  The  country  had  been 
doing  ninety  per  cent  of  its  business  upon  credit  instru- 
ments— not  actual  money,  and  when  these  instrument! 
were  refused  a  financial  panic  was  the  result.   Men  pre- 


122  THE  METHODS  OF   BANKING. 

f  erred  currency  in  hand  to  the  best  kind  of  credit  account, 
and  as  a  result  the  actual  money  was  locked  up  in  pri- 
vate vaults.  Currency  became  so  scarce  that  it  had  to 
be  bought  as  merchandise  at  a  heavy  premium.  Mer- 
chants were  forced  to  send  by  express  the  actual  bills  to 
meet  distant  accounts  and  to  pay  the  expenses  of  their 
families  at  the  summer  resorts.  Checks  were  useless 
away  from  the  banks  upon  whidi  they  were  drawn. 
More  than  $300,000,000  was  withdrawn  from  the  banks 
and  hoarded  by  the  owners. 

This  situation  brought  into  local  circulation  several 
forms  of  currency — credit  instruments — which  were  de- 
cidedly unique.     The  most  common  of  these  were  the 


THIS  I*  TO  eCHTirv.  TiMTTMat  tuw  mm  owmitc*  m  tmi*  ■««»  riWK  OOLL«Wg.  »M*«ntoti»«  MAata 

Mia  CMTiriUTt.  m  «««atHT  ruaaa  rOW*  MONTHS  raeii  oatc 

SOUTH  CHATTAJ^C^J><V»^%>W^'«Og  *'^SJ*— ^ 

riRST   NATIONAL   BANK.  SBn^i^KlTIZtNS  BANK  41  TRUST  CO^ 

TNIRD    NATIONAL    BANK.  ^^BLWlMj^tllttiL,  PWOBASCO -4  COw 

CHATTANOOOA  NATIONAL  BMKjmfggjf^  CHATTANOOOA  SAVINGS  BANK. 
————— SOUTH  CHATTANOOOA  SAVINGS  SANK. 
VkM«  OcanrtMTa  i«  ac^wato  a«  *m(  aiMaiT  er  waaavia  aiavaitita  la  ?■»  auaaa  •»  T  O.  MONTASUC.  •  at^ 
ifgn  fm*  Wawaaa*  Saw.  a»  a»ataeua  to  »ia»»a»  *  ana  inoaa*  au.  aucw^ytirwTta.         ^^ 

eiMTT4Maoa«  Cicaaiaa  Heuaf  Aa>os>*f  laa. 


♦  A  Clearing  House  Certificate. 

emergency  clearing-house  certificates,  their  object  being 
to  extend  indefinitely  the  brief  term  of  mutual  credit 
involved  in  all  clearing-house  settlements.  They  were 
in  reahty  not  used  as  currency,  but  their  effect  was  to  add 
their  face  value  to  the  volume  of  currency  in  circulation, 
by  releasing  for  use  outside  that  which  would  otherwise 
have  been  reserved  for  clearing-house  settlements.  In 
each  instance  the  use  of  the   certificates    was    limited 


THE  METHODS  OF  BANKING.  128 

strictly  to  settlement  of  mutual  accounts  between  mem- 
bers of  the  particular  clearing-house  association  issuing 
the  certificate.  The  certificates  were  issued  to  banks  upon 
securities  which  they  furnished.  Such  certificates  were 
also  used  during  the  financial  depression  of  1907-08.   , 

Other  devices  of  similar  character  were  clearing-house 
due  bills.  These  stated  that  a  certain  sum  was  due  by 
a  particular  bank  to  some  other  bank  or  to  the  order  of 
some  individual  and  usually  had  the  following  additional 
wording :  This  due  bill  is  only  good  when  signed  by  one 
and  countersigned  by  another  authorized  person  and  is 
payable  only  in  the  exchanges  through  the  clearing-house 
the  day  after  issue. 

Another  expedient  favored  in  all  parts  of  the  country, 
was  the  sale  by  banks  of  certified  checks  against  them- 
selves for  currency  denominations,  which  when  signed 
by  the  purchaser,  were  used  by  him  as  currency. 

Most  generally  used  of  all,  however,  were  pay  checks 
in  currency  denominations,  which  in  scores  of  manufac- 
turing towns,  were  the  only  currency  that  was  available 
for  weekly  payments  and  cash  purchases  by  ,wage- 
earners. 

In  addition  to  these  well-defined  classes,  there  were 
others  so  varied  that  but  a  suggestion  of  them  can  be 
made — negotiable  certificates  of  deposit ;  ninety-day  and 
other  short  time  paper  in  currency  denominations;  bond 
certificates ;  grain  purchase  notes ;  credit  and  corporation 
store  orders;  improvement  fund  orders;  teachers'  war- 
rants; shingle  scrip,  etc.  In  every  case  where  the  as- 
sociated banks  of  a  section  failed  to  supply  the  needed 
currency,  individuals  and  corporations  were  compelled 


124  THE   METHODS  OT  BANKINa. 

to  resort  to  extraordinary  devices.  This  illegal  banknote 
currency  was  accepted  by  the  community,  the  financial 
conditions  became  normal  again,  and  every  credit  in- 
strument was  made  good  in  actual  money. 

Usury  and  Its  Penalty. 
The  laws  of  some  of  the  states  for  collecting  more  than 
the  legal  rate  of  interest  are  quite  severe.  National  banks 
,  which  collect  more  than  the  legal  rate  can  only  be  pro- 
ceeded against  under  the  U.  S.  Interest  Penalty  Act, 
which  provides  that  usury  shall  be  punished  by  a  for- 
feiture of  twice  the  amount  of  interest  paid,  if  action 
is  commenced  within  two  years  of  the  time  of  such 
usurious  practice,  and  that  recovery  can  be  had  for  the 
entire  amount  of  interest  paid  at  any  time. 

/ 
Bank  Examinations. 

National  banks  are  examined  once  or  twice  a  year  by 
a  United  States  Bank  Examiner,  who  has  authority  from 
the  Comptroller  of  the  Currency,  to  whom  his  reports  are 
made.  These  reports  are  seldom  if  ever  seen  by  bank 
officers,  and  unless  the  examiner  chooses  to  inform  them 
that  everything  is  right  they  are  none  the  wiser. 

When  a  national  bank  becomes  embarrassed  it  is  the 
business  of  the  Bank  Examiner  to  look  thoroughly  into 
its  affairs  and  if  necessary  to  close  its  doors. 

The  Cheque  Bank. 
This  is  an  English  institution  with  a  branch  in  New 
York  city  and  agencies  in  other  cities.  This  bank  sells 
to  its  customers  a  book  of  checks,  each  of  which  can  be 
filled  up  only  to  a  limited  amount,  as  shown  by  printed 
and  perforated  notices  appearing  on  the  blank.    For  im- 


THE  METHODS  OF  BANKING.  125 

stance  for  £100  one  can  buy  a  check-book  containing 
fifty  blank  checks  each  good,  when  properly  filled  up, 
for  £2.  Each  of  these  checks  is  really  a  certified  check, 
only  it  is  certified  in  advance  of  issue.  Its  payment  is 
guaranteed  by  the  bank  rather  than  by  the  maker.  Any 
of  the  thousand  or  more  foreign  banks  which  are  agents 
for  the  Cheque  Bank,  sell  these  check-books  and  cash  the 
checks  when  presented. 

The  Bank  of  England  is  a  bankers'  bank  in  the  sense 
that  it  holds  reserves  of  other  banks,  and  makes  those 
final  payments  of  cash  which  close  the  general  balance  of 
transactions.  The  Cheque  Bank  is  a  bankers'  bank  in 
the  opposite  sense  of  making  deposits  in  all  other  banks 
and  employing  them  as  agents. 

Although  the  checks  are  issued  for  limited  amounts 
they  may  be  drawn  for  any  amount  within  the  maximum 
value.  The  amounts  that  may  be  short  drawn,  go  toward 
the  cost  of  a  new  check-book,  or  may  be  returned  in  cash. 
A  form  of  claim  for  the  short-drawn  balances  is  pro- 
vided on  the  cover  of  each  check-book.  Check-books  are 
made  up  to  suit  the  customers'  convenience,  and  may  be 
had  either  with  checks  all  of  the  same  denomination  or 
of  assorted  values.  Paid  checks  are  returned  when  re- 
quest for  them  is  made. 

All  checks  are  issued  crossed  and  payable  to  order. 
This  requires  the  indorsement  of  the  persons  to  whom 
the  checks  are  paid,  and  the  further  security  that  checks 
can  only  be  cleared  by  passing  through  the  hands  of  a 
banker. 

'     A  peculiar  feature  of  the  Cheque  Bank  is  that  it  en- 
lirtly  abstains  from  using,  or  tven  holding,  the  money 


IfC  THE  METHODS  OF   BANKING. 

deposited  in  payment  of  check-books.  This  money  is  left 
to  draw  interest  and  to  meet  demands,  in  the  hands  of 
the  bankers  through  whom  the  check-books  are  issued. 
These  checks  are  being  used  largely  by  travelers  in- 
stead of  letters  of  credit.  The  American  and  other  ex- 
press companies  have  a  form  of  check  which  is  very  simi- 
lar and  which  is  used  largely  by  Americans  travehng  in 
Europe.     Some  banks  also  issue  "travelers'  checks.'* 

Bank  Statements. 

A  bank  statement  is  a  balance-sheet  of  the  bank's  main 
ledger,  and  is  sworn  to  by  the  cashier  and  attested  by 
several  of  the  directors.  It  is  pubhshed  at  the  time  of  its 
making  in  the  local  newspaper. 

The  resources  in  such  a  statement  usually  consist  of 
items  due  from  other  financial  institutions,  bank  bills, 
and  specie  on  hand,  bonds  deposited  with  the  United 
States  treasurer;  loans  and  discounts,  consisting  of  dis- 
counted notes,  drafts,  etc.,  owned  and  held  by  the  bank 
and  which  are  maturing  and  being  paid  from  day  to  day; 
real  estate,  etc. 

The  liabilities  consist  of  the  accounts  due  depositors 
and  other  banks;  outstanding  circulation  of  bank  notes; 
undivided  profits;  surplus  fund;  original  capital  stock, 
etc. 

Bank  Debits  and  Credits. 

The  bank's  debits  for  any  day  may  consist  of. 

1.  Deposits — the  gross  amount  of  money  received  on 
deposit. 

2.  Matured  Loans — notes  discounted  that  have  been 
paid. 


THE  METHODS  OF  BANKING.  127 

8.     Interest — money  received  for  interest  from  all 
sources. 

4.  Exchange — ^money  received  as  exchange  on  col- 
lections. 

5.  Discount — ^the  discounts  on  notes  and  other  com- 
mercial paper. 

6.  U.  S.  Treasury — remittances  received  in  payment 
for  notes  sent  for  redemption. 

7.  Circulation — new  bank  notes  of  the  bank's  own 
issue  received  from  Comptroller  of  the  Currency. 

The  bank's  credits  may  consist  of. 

1.  Checks — paid  during  the  day. 

2.  Loans — gross  amount  of  net  proceeds  of  paper 
discounted. 

3.  Expense — ^running  expenses  of  the  bank 

4.  Interest — on   deposits   and   rebates    on   prepaid 
discount  paper. 

5.  Exchange — cost  of  collections  made,  charges  on 
foreign  paper,  etc. 

6.  Dividends — paid  stockholders. 

7.  U.  S.  Treasury — cash  sent  for  new  small  legal 
tenders,  etc. 

8.  Circulation — ^notes  of  the  bank's  own  issue  retired 
in  any  way. 

Value  of  Paper  Offered  for  Discount. 
One  of  the  most  valuable  parts  of  a  banker's  education 
is  to  learn  whom  to  trust.  Every  bank  should  have  a 
well-organized  and  thoroughly  equipped  credit  depart- 
ment, in  charge  of  some  one  who  can  be  relied  upon  to 
investigate  carefully  all  names  referred  to  him  by  the 
officers. 


198  TBX  jLETm/w  OP  mkXfKmm. 

A  man  who  desires  to  borrow  money  from  a  bank 
should  offer  the  same  confidence  that  he  would  offer  if 
he  were  going  to  a  wholesale  dealer  to  buy  goods.  The 
merchant  has  a  commodity  to  sell  and  he  looks  for  facts 
which  will  aid  him  in  determining  the  line  of  credit  to 
be  granted.  The  banker  has  money  to  sell  and  he  should 
be  doubly  sure  of  the  responsibility  of  the  party  to  whom 
he  is  selling  it  because  the  money  does  not  belong  to  him. 
A  banker  has  a  right  to  expect  the  fullest  confidence  on 
the  part  of  the  borrower,  and  the  borrower  should  furnish 
him  with  a  complete  and  detailed  statement  of  the  condi- 
tion of  his  affairs.  It  is  safe  to  conclude  that  when  a 
borrower  refuses  absolutely  to  give  any  information  as 
to  his  financial  condition,  his  credit  is  not  in  the  most  fa- 
vorable condition. 

Many  of  the  banks  have  blank  forms  which  they  from 
time  to  time  ask  borrowers  to  fill  out.  These  statements 
show  in  detail  the  assets  and  liabilities  of  the  firm  in 
question;  they  show  the  notes  which  are  outstanding, 
the  mortgages  on  real  estate,  and  many  other  particulars 
including  the  personal  or  individual  credit  of  members  of 
the  firm,  if  a  partnership.  The  total  net  worth  of  the 
borrower  should  be  first  considered;  then  the  character 
of  his  business,  whether  it  is  speculative  or  staple;  then 
his  record  and  standing  in  the  conmaunity ;  then  his  busi- 
ness habits;  then  a  consideration  of  whether  he  is  in  en- 
terprise abreast  with  modern  ideas  and  methods. 

The  paper  offered  for  discount  is  of  a  variety  of  kinds. 
The  larger  proportion  of  it  is  from  customers  of  the  bor- 
rower who  have  extended  their  credit  by  paying  their 
accounts  in  notes  instead  of  in  cash.  Such  paper  is  real- 
ly, though  having  two  namss,  rery  littl*  better  than 


THE   METHODS  OF  BANKING.  129 

Single-name  paper,  for  it  is  not  the  maker's  credit,  but 
the  payee's,  which  the  bank  usually  considers.  Many 
very  small  notes  offered  for  discount  usually  indicate  a 
very  needy  condition. 

There  are  times  when  the  character  of  the  merchandise 
owned  by  the  borrower  should  be  considered.  What 
would  it  bring  under  the  hammer?  Groceries  and  raw 
materials  can  usually  be  turned  into  cash  at  a  forced  sale 
at  very  small  discount  from  current  prices.  Not  so 
with  hardware,  glass,  dry  goods,  boots  and  shoes,  books, 
etc.  Machinery  and  fixtures  are  not  a  bankable  asset 
upon  which  to  base  credit. 

The  banker  should  also  note  his  borrower's  bills  pay- 
able. Why  did  he  give  notes?  Are  they  met  promptly? 
Many  houses  prefer  to  sell  their  own  paper  in  the  open 
market  and  keep  their  banks  open  for  accommodations 
when  they  are  unable  to  secure  outside  credit. 

The  insurance  carried  should  be  considered,  also  the 
volume  of  business  done.  A  large  business  on  moderate 
capital,  with  long  credits,  will  naturally  have  large  ha- 
bilities,  while  a  small  business,  with  liberal  capital,  and 
short  credits,  should  have  small  liabilities. 

There  are  many  firms  which  carry  two  or  more  bank 
accounts  and  others  who  sell  their  paper  to  out-of-town 
banks.  In  buying  paper  it  is  important  to  ascertain 
whether  the  firm  is  in  the  habit  of  taking  up  paper  at 
one  bank  by  floating  a  note  at  another. 

A  prominent  banker  classifies  paper  as  to  its  discount 
value  as  follows: 

1.  Bankers'  paper  including  bills  of  exchange. 

2.  Remittance  paper — ^bills  drawn  by  houses  abroad 
on  banks  or  correspondents  in  Europe. 

I.B.L.   Vol.  4—9 


180  THE  METHODS  OF   BANKING. 

3.  Inland  drawn  paper — bills  drawn  by  shippers  of 
goods  on  the  houses  to  whom  the  goods  are  shipped. 

4.  Brokers'  paper — bills  drawn  by  importers  against 
commodities  placed  in  brokers'  hands  for  sale. 

5.  Trade  paper — bills  arising  out  of  our  manifold 
trades  and  industries. 

6.  Drafts  with  bills  of  lading  attached. 

7.  Paper  having  personal  indorsements. 

8.  Paper  secured  by  collateral. 

9.  Individual — or  one  name  paper. 

Mercantile  Agencies. 

In  large  cities  and  towns,  bankers  and  other  business 
men  should  avail  themselves  of  the  advantages  offered 
by  mercantile  agencies.  These  concerns  report  to  their 
subscribers  upon  the  credit  of  men  in  various  lines  of 
business.  They  gather  their  information  from  a  variety 
of  sources.  This  service  has  been  very  much  improved 
of  late  years,  and  after  making  all  due  allowance  for 
the  inherent  defects  of  the  system,  it  is  stiU  a  useful  ad- 
junct to  the  man  who  is  giving  credit.  Bradstreefs  and 
Dun  (|  Co.  are  the  two  largest  mercantile  agencies  in 
this  country. 

Savings  Banks. 

Savings  banks  have  no  special  capital  owned  by  stock- 
holders. Their  capital  is  the  money  received  on  deposit, 
which,  of  course,  is  the  property  of  a  great  many  people. 
Every  depositor  is  an  owner  in  the  bank,  and  the  profit 
is  paid  to  depositors  in  interest.  This  capital  is  invested 
in  choice  securities.  The  corporation  is  simply  the  agent 
or  trustee  of  the  whole  body  of  depositors,  and  works 
for  their  account  and  benefit  and  not  for  its  own. 


THE   METHODS  OF   BANKING.  131 

In  most  of  the  states,  the  savings  banks  are  organized 
under  State  laws  and  are  in  a  limited  way  under  State 
supervision.  Their  chief  purpose  is  to  encourage  the 
saving  of  money  by  the  common  people. 

In  some  countries  government  savings  banks  have 
been  established.  In  Canada  almost  every  post  office  is 
a  branch  of  the  government  post  office  savings  bank. 

Defalcations  and  Embezzlements. 

An  experienced  banker  offers  the  following  sugges- 
tions to  prevent  defalcations  and  embezzlements  through 
the  manipulating  of  the  bank's  record  books:  Secure 
clerks  of  high  character  and  integrity  and  have  a  proper 
system  of  accounts  with  a  perfect  system  of  checking 
everything.  If  possible  keep  accounts  in  duplicate.  The 
balance  ledger  can  be  proved  to  a  cent  every  day,  and 
this  should  certainly  be  done.  When  practicable,  it  is 
better  to  have  all  differences  investigated,  and  reported 
upon  by  some  one  who  is  not  directly  responsible. 

A  number  of  banks  in  the  large  cities  have  created 
the  position  of  auditor  of  accounts,  and  it  is  one  of  his 
duties  to  report  to  the  cashier  direct  upon  all  differences. 
This  auditor  reconciles  accounts-current  with  out-of-town 
correspondents,  balances  and  dehvers  all  pass-books,  and 
furnishes  information  to  all  depositors  respecting  their 
accounts.  A  great  benefit  is  secured  to  a  bank  by  the  ex- 
amination of  one  man's  work  by  another. 

Pass-books  of  active  accounts  should  be  written  up 
once  a  month,  and  no  pass-book  should  run  longer  than 
two  months  before  being  balanced.  It  should  be  a  rule 
in  every  bank  that  no  charge  entry  should  be  put  through 
the  books,. except  from  a  proper  voucher,  that  is,  a  check 


132  THE   METHODS   OF   BANKING. 

signed  by  a  depositor,  or  a  charge  ticket  made  out  and 
signed  by  an  officer  of  the  bank.  The  discount  clerk 
and  the  collection  clerk  should  not  be  the  same  person 
and  neither  of  them  should  be  the  corresponding  clerk. 
The  monthly  accounts-current  rendered  by  a  city  cor- 
respondent should  be  reported  upon  promptly,  and  any 
disposition  on  the  part  of  the  bookkeeper  to  delay  or 
neglect  this  matter  should  be  corrected. 

A  very  important  requisite  in  modern  banking  is  a 
system  of  thorough  examination  at  irregular  intervals. 
No  teller,  bookkeeper,  or  other  clerk  can  suffer  the  slight- 
est harm  from  having  his  cash  and  books  examined  and 
found  correct.  All  notes  held  for  collection  should  be 
accounted  for,  and  balances  due  from  other  banks  for 
collections  should  be  verified.  Special  deposits  of  se- 
curities held  for  safe-keeping  should  be  examined  oc- 
casionally. The  more  complex  the  bookkeeping  the 
easier  it  is  to  "cook"  the  accounts. 

CJommercial  Crises. 

Disturbances  of  the  course  of  trade  arise  largely  from 
the  necessity  of  readjusting  its  conditions  to  the  common 
standard  and  measure  of  value.  The  common  standard 
of  value  is  money,  and  the  conditions  of  trade  which 
require  to  be  adjusted  to  it  are  the  price  of  commodities, 
and  contracts  and  obHgations  of  all  kinds.  Contracts 
and  obligations,  agreements  to  pay  money  at  a  future 
time  for  something  presently  received,  form  the  credit 
system  of  modern  commerce.  Inability  to  meet  these 
obligations  constitutes  bankruptcy,  and  a  great  multipli- 
city of  bankruptcies  occurring  simultaneously  constitutes 
a  commercial  crisis. 


THE   METHODS   OF   BANKING.  133 

If  all  persons  were  in  the  habit  of  paying  immediately 
for  everything  received,  there  could  be  no  debts,  and 
consequently  no  failures  nor  panics.  Those  nations 
where  the  credit  system  has  received  its  widest  devel- 
opment, and  where  consequently  the  spirit  of  commer- 
cial adventure  and  speculation  is  most  rife,  are  most  ex- 
posed to  the  ravages  of  recurring  periods  of  bank- 
ruptcy. 

Money  panics  are  usually  preceded  by  years  of  active 
trade,  high  wages,  multiphcation  of  new  enterprises,  and 
general  prosperity.  Each  period  of  abnormal  and  ex- 
citing prosperity  is  followed  by  a  violent  collapse,  re- 
sulting in  increased  rates  of  interest,  closing  of  factories, 
failures  of  banks  and  mercantile  houses,  and  enforced 
idleness  of  large  numbers  of  people,  often  resulting  in 
extreme  social  disturbances.  There  is  no  remedy  except 
in  the  concurrence  of  mankind  to  keep  out  of  debt  and 
to  avoid  all  temptation  to  make  gain  without  equiva- 
lent labor.  This  is  impossible,  however.  Civihzation  is 
so  interlaced  with  the  credit  system  that  it  is  idle  to 
talk  of  abolishing  it.  The  interests  of  mankind  require 
that  it  should  continue,  even  at  the  cost  of  its  abuses. 

There  is,  too,  a  desire  for  gain  without  labor  which 
is  legitimate.  Nine-tenths  of  all  the  inventions  and  dis- 
coveries which  have  advanced  mankind  from  the  stone 
age  to  the  age  of  electricity  have  had  their  origin  in  this 
desire.  It  may  be,  too,  that  an  occasional  crisis  is  a  good 
thing,  inasmuch  as  it  shows  commercial  leaders  by  an 
object  lesson  the  influences  which  tend  to  make  trade 
successful  or  disastrous. 


,^^- M^ 


'Pax' TO  THE  ORDER  OF 


.'DOLLAPS 


Form  of  Check. 


.^^ 


Check  Stub. 


CHAPTER  VII. 

THE  CLEARING-HOUSE  SYSTEM. 

In  large  cities  checks  representing  millions  of  dollars 
are  deposited  in  the  banks  every  day.  The  separate  col- 
lection of  these  would  be  almost  impossible,  were  it  not 
for  the  clearing-house  system. 

Each  large  city  has  its  clearing-house.  It  is  an  estab- 
lishment formed  by  the  banks  themselves,  and  for  their 
own  convenience.  The  leading  banks  of  a  city  connect 
themselves  with  the  clearing-house  of  that  city,  and 
through  other  banks  with  the  clearing-houses  of  other 
cities,  particularly  New  York.  Country  banks  connect 
themselves  with  one  or  more  clearing-houses  through  city 
banks  which  do  their  business  for  them.  The  New  York 
banks,  largely  through  private  bankers,  branches  of  for- 
eign banking  houses,  connect  themselves  with  London. 
So  that  each  bank  in  the  world  is  connected  indirectly 
with  every  other  bank  in  the  world,  and  in  London  is  the 
final  clearing-house  of  the  world.  The  daily  clearings  in 
New  York  in  1909  averaged  $326,505,468  (for  51 
banks)  and  the  average  daily  balances  paid  in  money 
amounted  to  $13,797,644. 

Usually  once  a  week  the  banks  of  a  city  make  to  their 
clearing-house  a  report  based  on  daily  balances,  of  their 
condition. 

Check  Collections. 

Each  bank  in  a  city  receives  on  deposit,  daily,  checks 
on  other  banks.    Instead  of  sending  these  by  messenger 

135 


136  THE  CLEARING-HOUSE  SYSTEM. 

to  the  other  banks  they  are  sent  to  the  clearing-house  at 
a  fixed  hour  each  day — in  some  cities  twice  a  day. 

The  banks  of  a  clearing-house  city  are  numbered. 
These  numbers  are  seen  stamped  upon  checks  which  the 
bank  handles  in  the  process  of  collection.  Bank  A  may 
for  instance  carry  checks  amounting  to  $200,000  to  the 
clearing-house  for  collection.  Banks  C,  D,  E  and  F 
may  have  checks  on  A  amounting  to  $189,240,  which 
they  send  to  the  clearing-house  for  collection.  This 
would  show  a  balance  of  $10,760  in  A's  favor,  which  is 
paid  to  bank  A  by  the  clearing-house  in  clearing-house 
certificates  or  due  bills.  If  the  balance  were  against  A, 
the  amount  due  would  have  to  be  made  up  within  the 
hour  limit  fixed  by  the  clearing-house  regulations. 

Suppose,  for  illustration,  that  Brown  of  Lynn  owes 
Smith  of  Media  $25,  and  pays  the  amount  by  a  check  on 
a  Lynn  bank.  This  check  will  go  by  mail  from  Lynn 
to  Media.  Smith  will  deposit  it  in  a  Media  bank.  The 
Media  bank  will  send  it  with  other  checks  to  its  Phila- 
delphia correspondent,  say  the  Penn  National.  The 
Penn  National  will  send  it  with  other  checks  to  its  New 
York  correspondent,  say  the  Chemical  National.  The 
Chemical  will  forward  it  with  other  checks  to  its  Boston 
correspondent,  say  the  First  National.  Now  the  First 
National  of  Boston  may  not  be  the  Boston  correspondent 
of  the  Lynn  bank.  It  therefore  sends  the  check  for  col- 
lection through  the  Boston  clearing-house  to  the  bank 
which  does  the  Boston  business  for  the  particular  Lynn 
bank  upon  which  the  check  is  drawn,  say  the  Second  Na- 
tional. The  Second  National  sends  the  check  to  Lynn, 
where  it  is  charged  up  against  Brown's  account.     This 


THE  CLEAEING-HOUSE  SYSTEM. 


137 


system  of  collections  is  almost  as  perfect  as  is  the  post- 
office  system  of  carrying  registered  mail. 

The  Wanderings  of  Checks. 
Under  old-fashioned  methods,  each  bank  was  in  the 
habit  of  selecting  its  collection  agents,  sending  them  by 
mail  their  collection  paper,  charging  their  customers 
very  substantial  collection  rates  and  passing  the  same  to 
their  credit  when  collected.  Nowadays  the  country 
trader,  no  matter  where  he  is  located,  sends  his  check  on  a 


T 

'" 

^^^«r«.r 

"^V're,^ 

"a^ 

M0»4t 

local  bank  to  pay  his  account  in  a  distant  city,  and  the  re- 
ceiver of  the  check  expects  his  bank  to  collect  the  amount 
of  the  check  free  of  expense,  and  to  give  him  full  credit 
for  it  the  day  it  is  deposited. 

Suppose  for  instance  that  a  merchant  of  Selma,  Ala., 
sends  his  check  on  a  Selma  bank  by  mail  to  pay  a  bill  in 
Alpena,  Mich.  The  Alpena  merchant  deposits  it  in  his 
local  bank,  and  this  local  bank  sends  it  to  its  Detroit  cor- 


138  THE  CLEAEING-HOUSE  SYSTEM. 

respondent;  that  is,  deposits  it  in  the  Detroit  bank 
where  its  account  is  kept.  The  Detroit  bank  sends  the 
check  to  its  Chicago  correspondent.  The  Chicago  bank 
may  have  no  connection  with  a  Southern  city.  It  sends 
the  check  to  its  New  York  correspondent.  The  New 
York  bank  forwards  the  check  to  New  Orleans,  where  it 
may  pass  through  the  clearing-house  to  some  other  New 
Orleans  bank  which  forwards  it  to  its  correspondent  in 
Mobile.  The  Mobile  bank  sends  the  check  to  Selma,  and 
has  it  charged  up  to  the  account  of  the  man  who 
issued  it. 

Now  all  these  banks  and  clearing-houses  through 
which  the  check  passes,  stamp  their  indorsement  and 
other  information  on  the  back  of  the  check,  so  that  the 
check  itself  bears  a  complete  record  of  its  travels. 

Millions  of  dollars  are  collected  by  banks  daily  in  this 
way,  and  generally  without  expense  to  their  customers. 
It  is  estimated  that  these  collections  cost  the  New  York 
city  banks  more  than  two  million  dollars  a  year  in  loss  of 
interest  while  the  checks  are  en  route.  Fifteen  thousand 
collection  letters  are  sent  out  every  day  by  the  banks  of 
New  York  City  alone.  There  have  been  spasmodic  at- 
tempts in  some  cities  to  make  a  charge  for  the  collection 
of  out-of-town  checks,  but  such  attempts  are  unpopular 
among  business  men. 

Clearing-house  Management. 

The  bank  clerks  who  attend  to  the  clearing-house  busi- 
ness must  be  experts  in  their  special  work.  The  shghtest 
error  on  the  part  of  one  clerk  may  prolong  indefinitely 
the  entire  settlement.  As  a  check  against  error  very  se- 
vere rules  are  estabhshed.  The  following  are  samples 
from  the  by-laws  of  a  large  clearing-house : 


THE  CIJ:ARING- HOUSE  SYSTEM.  139 

"1.  For  disorderly  conduct  of  any  clerk,  or  other  of- 
ficer, at  the  clearing-house,  or  disregard  of  the  manager's 
rules  and  instructions,  for  each  offense,  $4.00. 

"2.  For  any  officer  failing  to  attend  punctually  at 
the  hour  for  making  the  exchanges,  $4.00. 

*'3.  Debtor  banks,  failing  to  appear  to  pay  their  bal- 
ances before  a  quarter  past  12  o'clock,  $3.00. 

"4.  Any  error  in  the  credit  ticket  (that  is  the  amount 
brought),  $2.00. 

"5.  Errors  in  making  the  balance  ticket  (that  is,  the 
amount  received)  entries,  $2.00. 

"6.  Failing  to  deUver  check  tickets  before  half -past 
ten  o'clock,  $1.00. 

"7.     All  other  errors,  $2.00. 

"Any  clerk,  or  other  officer,  who  shall  repeatedly  and 
perseveringly  disobey  the  orders  or  instructions  of  the 
manager,  shall,  with  the  approbation  of  the  clearing- 
house committee,  be  expelled,  and  not  readmitted  without 
the  written  consent  of  the  committee.  Thirty  minutes 
will  be  allowed  for  the  morning  business  settlement,  and 
for  each  additional  fifteen  minutes'  detention,  $2  will  be 
added  to  the  fine  under  No.  3." 

The  following  selections  from  the  general  rules  of  the 
same  clearing-house  will  give  the  reader  some  idea  of  the 
exacting  character  of  clearing-house  regulations : 

"Errors  in  the  exchanges  and  claims  arising  from  the 
return  of  checks  or  other  cause  are  to  be  adjusted  directly 
between  the  banks  which  are  parties  therein,  and  not 
through  the  clearing-house. 

"Whenever  checks  which  are  not  good  are  sent 
through  the  clearing-house  they  shall  be  returned  by  the 
banks  receiving  the  same  to  the  banks  from  which  they 


140  THE  CLEAEING-HOUSE  SYSTEM. 

were  received  as  soon  as  it  shall  be  found  that  said  checks 
are  not  good;  and  in  no  case  shall  they  be  retained  after 
one  o'clock. 

"The  manager  shall  immediately  report  to  the  clears 
ing-house  committee  any  apparent  irregularity  in  the 
deahngs  of  any  bank  belonging  to  the  association  that 
comes  to  his  notice,  and  receive  the  instructions  of  the 
committee  in  regard  thereto. 

"The  committee  shall  have  power  to  remove  the  mana- 
ger or  any  of  the  clerks,  whenever,  in  their  opinion,  the 
interests  of  the  association  shall  require  it. 

"The  hour  for  making  the  exchanges  at  the  clearing- 
house shall  be  ten  o'clock  A.  M.  each  day.  At  a  quarter 
past  twelve  o'clock,  noon,  the  debtor  banks  shall  pay  to 
the  manager,  at  the  clearing-house,  the  balances  due 
from  them  respectively  either  in  coin  or  in  such  other 
currency  as  the  laws  of  the  United  States  shall  require, 
or  in  such  certificates  as  shall  be  authorized  by  the  clear- 
ing-house association,  excepting  sums  less  than  one  thou- 
sand dollars,  which  may  be  paid  in  bills  of  the  debtor 
bank. 

"At  half -past  one  o'clock  P.  M.  the  creditor  banks 
shall  receive  from  the  manager,  at  the  same  place  the 
balances  due  to  them  respectively ;  provided  all  the  bal- 
ances due  from  the  debtor  banks  shall  then  have  been 
paid  to  him. 

"Should  any  bank  fail  to  pay  the  balance  due  from  it 
at  the  proper  hour  the  amount  of  such  balance  shall  be 
immediately  furnished  to  the  clearing-house  by  the  sev- 
eral other  banks  in  proportion  to  their  respective  balances 
against  the  defaulting  bank  resulting  from  the  ex- 
changes of  that  day." 


THE  CLEARING-HOUSE  SYSTEM.  141 

Foreign  Clearing-houses. 

England  has  three  bank  clearing-houses  and  France 
one.  The  clearing  principle  is  used  in  England  to  ad- 
just the  complicated  accounts  of  the  through  traffic  of 
connecting  railroads,  and  to  simplify  the  fortnightly 
deliveries  of  stock  on  the  London  Stock  Exchange.  Ev- 
ery clearing-house  bank  in  London,  and  the  clearing- 
house itself,  keep  accounts  with  the  Bank  of  England, 
and  differences  are  settled  by  transfers  from  one  account 
to  another. 

London  originated  the  clearing-house.  It  was  formed 
spontaneously  by  the  clerks  of  the  London  private 
bankers,  who,  to  save  themselves  the  trouble  of  going 
about  to  each  bank,  got  into  the  habit  of  meeting  in  a 
central  room  to  settle  their  mutual  claims.  A  similar 
practice  arose  among  French  merchants,  in  old  times,  of 
making  their  bills  payable  at  the  great  annual  fair  in 
Lyons,  where  they  met  to  balance  their  debts,  and  pay 
the  differences. 

If  gold  were  to  be  used  instead  of  the  clearing-house 
machinery  in  either  New  York  or  London,  the  weight  to 
be  moved  every  day  over  long  distances  would  exceed 
200  tons.  The  clearing-house  establishes  a  fellowship 
among  banks  that  has  already  proved  in  times  of  money 
panics  of  the  greatest  service  to  themselves  and  the  com- 
munity. 


CHECKS  ON  OTHER  CHICAGO  BANKS 


DCPOSITCD  WITH 


First  National  Bank, 


POKH  U-« 

Rrst  National  Bank 

OF  CHICAGO. 

DepoMadL  far  acecwni  tf 


Deposit  Slip. 


CHAPTER  VIII. 

DEPOSITS  ANB  DEPOSITORS. 

When  you  enter  a  bank  to  open  an  account,  inquire 
for  the  cashier,  and,  if  convenient,  take  with  you  some 
one  who  can  introduce  you  and  identify  you  as  the  per- 
son you  profess  to  be. 

If  you  go  alone,  do  not  feel  hurt  if  a  number  of  ques- 
tions are  asked  you.  While  you  may  be  perfectly  honest, 
a  large  number  of  people  make  their  living  by  being 
sharp,  and,  besides,  it  is  necessary  to  establish  those  con- 
fidential relations  which  ought  to  exist  in  all  financial 
transactions,  so  that'  the  cashier  may  know  something 
more  about  you  than  he  could  ascertain  by  merely  looking 
at  you,  and  taking  your  name  in  a  book. 

The  cashier  will  have  you  place  your  signature  in  a 
book.  Your  name  as  written  in  this  book  should  be  the 
same  in  style  as  you  intend  to  place  on  your  checks. 

If  necessary,  the  cashier  or  some  officer  of  the  bank, 
will  show  you  how  to  make  out  a  deposit  sHp.  He  will 
give  you  also  a  small  bank  book,  in  which  you  will  be 
credited  with  the  amount  of  money  which  you  deposit. 
East  time  you  deposit  money  you  will  be  required  to 
make  out  a  deposit  slip.  The  banks  furnish  the  printed 
blanks  free. 

Under  the  word  checks  on  the  blank  you  write  the 
names  of  the  banks  upon  which  the  checks,  if  any,  which 
you  are  depositing,  are  drawn.  If  a  check  is  on  a  distant 
city,  the  name  of  the  city  should  be  given. 

143 


144 


DEPOSITS  AND  DEPOSITORS. 


Your  bank  book  is  in  reality  your  only  receipt  from 
the  bank  for  the  money  you  deposit.  When  you  deposit 
money  hand  it  to  the  receiving  teller,  and  when  you  wish 
to  draw  money  present  your  check  to  the  paying  teller. 


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The  Union  Trust  Company, 

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Deposit  Slip. 

When  you  wish  to  have  your  bank  book  balanced  hand 
it  to  the  receiving  teller.  This  is  usually  done  on  the 
first  of  each  month.  The  paid  or  canceled  checks  are  re- 
turned to  you  in  a  day  or  two  when  you  get  your  bank 
book  back.  These  should  all  be  filed  in  an  orderly  way. 
They  serve  as  vouchers  and  may  be  useful  in  legal  com- 
pHcations. 

Hints  for  Depositors. 

Do  not  wait  until  you  get  to  the  bank  to  count  your 
money,  or  to  indorse  your  checks  and  arrange  your  de- 
posit.   This  should  be  done  before  you  come  to  the  bank. 


I 
DEPOSITS  AND  DEPOSITORS.  145 

or  at  least,  before  you  present  yourself  at  the  receiving 
teller's  window.  Be  sure  that  you  have  the  figures  cor- 
rect. Place  the  bills  all  one  way,  right  side  up.  Separate 
your  gold  and  silver,  and  sort  the  silver  by  denomina- 
tions. 

Do  not  deposit  your  dimes,  nickels,  and  pennies  until 
you  have  a  certain  amount  of  them,  say  five  dollars  of 
each ;  then  put  them  in  a  package,  with  the  amount  and 
your  name  marked  on  it,  and  leave  for  the  teller  to  count 
at  his  leisure,  with  the  understanding  that  if  short  or  over 
the  proper  correction  will  be  made. 

Bank  Checks. 
A  check  is  an  order  for  money,  drawn  by  one  who  has 
funds  in  the  bank,  payable  on  demand.    It  is  in  reality  a 
sight  draft  on  the  bank.    Banks  provide  blank  checks  for 


-j^Ddlaxs 


A  Poorly  Written  Check. 

their  customers,  and  it  is  a  very  simple  matter  to  fill  them 
out  properly.  In  writing  in  the  amount  begin  at  the  ex- 
treme left  of  the  hne. 

The  illustration  given  here  shows  a  poorly  written 
check  and  one  which  could  be  very  easily  raised.  A 
fraudulent  receiver  could,  for  instance,  write  "seventy" 
before  the  nine  and  "7"  before  the  figure  "9,"  and  in  this 
way  raise  the  check  from  $9  to  $79.    If  this  were  done 

I.B.I,.  Vol.  4—10 


146  DEPOSITS  AND  DEPOSITORS. 

and  the  check  cashed,  the  maker,  and  not  the  bank  would 
become  responsible  for  the  loss.  You  cannot  hold  the 
bank  responsible  for  your  carelessness.  A  check  was 
raised  from  $100  to  $190  by  the  writing  "and  ninety'' 
after  the  words  "one  hundred."  One  of  the  ciphers  in 
the  figures  was  easily  changed  to  a  "9"  by  adding  a  tail 

to  it.     It  is  wise  to  draw  a  running  line 

after  the  amount  in  words,  thus  preventing  any  addi- 
tional writing. 

Checks  should  be  dated,  but  the  absence  of  a  date  does 
not  warrant  a  bank  in  refusing  to  cash  the  check.  Notes 
made  and  executed  on  Sunday  are  invahd,  but  a  check  so 
dated  is  good. 

The  signature  should  be  in  your  usual  style  familiar  to 
the  paying  teller. 

A  check  is  a  draft  or  order  on  a  bank,  and  need  not 
necessarily  be  written  in  the  prescribed  form.  Such  an 
order  written  on  a  sheet  of  note-paper  with  a  lead  pencil 
might  be  in  every  way  a  legally  good  check. 

If  it  is  necessary  at  any  time  to  write  a  check  for  a 
fractional  part  of  a  dollar,  as  75  cts.,  write  '^Seventy-five 
Cents/'  and  draw  your  pen  through  the  printed  word 
Dollars. 

There  hangs  in  the  office  of  the  Pacific  Mills,  Boston, 
the  canceled  check  of  the  United  States  for  one  cent; 
and  on  the  walls  of  the  Bank  of  Commerce,  'New  York 
City,  hangs  a  handsomely  framed  check  for  $14,000,000, 
signed  by  the  well-known  banking  house  of  Kidder,  Pea- 
body  &  Co. 

Usually  checks  should  be  drawn  "to  order."  The 
words,  "Pay  to  the  order  of  John  Brown"  mean  tha,t  the 


DEPOSITS  AND  DEPOSITORS.  147 

money  is  to  be  paid  to  John  Brown  or  to  any  person  h^ 
orders  it  paid  to.  If  a  check  is  drawn  "Pay  to  Bearer," 
any  person,  that  is  the  bearer,  can  collect  it.  The  paying 
teller  may  ask  the  person  cashing  the  check  to  write  his 
name  on  the  back  simply  to  have  it  for  reference. 

In  writing  and  signing  checks  use  good  black  ink  and 
let  the  copy  dry  a  little  before  a  blotter  is  used. 

Safety  devices  to  prevent  the  fraudulent  alteration  of 
checks  are  of  almost  endless  variety,  but  there  has  not 
been  a  preventive  against  forgery  and  alterations  yet  in- 
vented which  has  not  been  successfully  overcome  by 
swindlers.  A  machine  for  punching  out  the  figures  is  in 
common  use,  but  the  swindler  has  successfully  filled  in 
the  holes  with  paper  pulp  and  punched  other  figures  to 
suit  his  purposes. 

The  method  adopted  by  the  express  companies  and  by 
the  post  office  department  in  its  money  orders  is  per- 
haps the  best  plan  yet  offered  to  prevent  the  raising  of 
the  amount  of  a  check  or  order.  A  glance  at  an  express 
money  order  will  illustrate  this  point.  Notice  the  printed 
line  on  the  left  end — "Not  payable  for  more  than  One 
Dollar"  or  "Five  Dollars,"  as  the  case  may  be.  To  raise 
such  an  order  it  would  be  necessary  to  add  to  the  length 
of  the  paper,  which  of  course  would  be  impossible. 

The  most  experienced  bankers  favor  a  plain  black  and 
white  check,  drawn  upon  clear  white  paper  with  good 
strong  black  ink. 

There  are  often  presented  to  banks  for  payment, 
checks  in  which  the  figures  in  the  margin  do  not  corres- 
pond with  the  amounts  stated  in  writing  in  the  body  of 
the  checks.  The  law  governing  cases  of  this  sort  pro- 
vides distinctly  that  the  amount  in  writing  shall  be  con- 


148  DEPOSITS  AND  DEPOSITORS. 

sidered  correct.  If  the  amount  of  money  involved  were 
large,  the  paying  teller  would  be  justified  in  withholding 
payment  until  he  satisfied  himself  that  the  amount  in 
writing  was  what  the  maker  really  intended  the  check  to 
call  for. 

Identification. 

The  banks  of  the  United  States  make  it  a  rule  not  to 
cash  a  check  that  is  drawn  payable  to  order,  unless  the 
person  presenting  the  check  is  known  at  the  bank — or 
unless  he  satisfies  the  paying  teller  that  he  is  really  the 
person  to  whom  the  money  is  to  be  paid.  It  must  be  re- 
membered, however,  that  a  check  drawn  to  order  and 
then  indorsed  in  blank  by  the  payee  is  really  payable  to 
bearer,  and  if  the  paying  teller  is  satisfied  that  the  pay- 
ee's signature  is  genuine  he  will  not  likely  hesitate  to  cash 
the  check.  In  England,  all  checks  apparently  properly 
indorsed  are  paid  without  identification. 

In  drawing  a  check  in  favor  of  a  person  not  likely  to 
be  well-known  in  banking  circles,  write  his  address  or  his 
business  after  his  name  on  the  face  of  the  check.  For  in- 
stance, if  you  should  send  a  check  to  John  Smith,  Boston, 
it  may  possibly  fall  into  the  hands  of  the  wrong  John 
Smith ;  but  if  you  write  the  check  in  favor  of  "John 
Smith,  849  Treinont  St.,  Boston,"  it  is  more  than  likely 
that  the  right  person  will  collect  it. 

If  you  wish  to  get  a  check  cashed  where  you  are  un- 
known, and  it  is  not  convenient  for  a  friend  who  has  an 
account  at  the  bank  to  go  with  you  for  the  purpose  of 
identification,  ask  him  to  place  his  signature  on  the  back 
of  your  check,  and  you  will  not  likely  have  trouble  in 
getting  it  cashed.    By  placing  his  signature  on  the  back 


DEPOSITS  AND  DEPOSITORS.  ±49 

of  the  check  he  guarantees  the  bank  against  loss.  A 
bank  is  responsible  for  the  signatures  of  its  depositors, 
but  it  cannot  be  supposed  to  know  the  signatures  of  in- 
dorsers.  The  reliable  identifier  is  in  reahty  the  person 
who  is  responsible. 

A  Banker's  Hints. 

Do  not  draw  a  check  unless  you  have  the  money  on  de- 
posit or  in  your  possession  to  deposit. 

Do  not  test  the  generosity  of  your  bank  by  presenting, 
or  allowing  to  be  presented,  your  check  for  a  larger  sum 
than  your  balance. 

Do  not  draw  a  check  and  send  it  to  a  person  out  of  the 
city  expecting  to  make  good  the  amount  before  it  gets 
back. 

Do  not  give  your  check  to  a  friend  with  the  condition 
that  he  is  not  to  use  it  until  a  certain  time. 

Do  not  send  ignorant  and  stupid  messengers  to  the 
bank  to  transact  your  business. 

Check  Indorsements. 
In  indorsing  checks  note  the  following  points : 

1.  Write  across  the  back — not  lengthwise. 

2.  If  your  indorsement  is  the  first,  write  it  an  inch  or 
two  from  the  top  of  the  back ;  if  it  is  not  the  first  indorse- 
ment write  immediately  under  the  last  indorsement. 

3.  Don't  indorse  wrong  end  up ;  the  top  of  the  back  is 
the  left  end  of  the  face. 

4.  Write  your  name  as  you  are  accustomed  to  write 
it,  no  matter  how  it  is  written  on  the  face.  There  is  a 
modern  tendency  to  make  the  indorsement  agree  in  all 
respects  with  the  name  of  the  payee  as  written  on  the 
face,  but  the  practice  of  changing  one's  signature  to  con- 


160 


DEPOSITS  AND  DEPOSITORS. 


form  with  the  whim,  the  carelessness  or  the  error  of  an- 
other, is  not  to  be  recommended. 

5.  If  you  are  depositing  the  check  write  or  stamp 
"For  Deposit"  over  your  signature.  This  is  hardly  nec- 
essary if  you  are  taking  the  check  yourself  to  the  bank. 
A  check  with  a  simple  or  blank  indorsement  on  the  back 
is  payable  to  bearer,  and  if  lost,  the  finder  might  succeed 


in  collecting  it,  but  if  the  words  "For  deposit"  appear 
over  the  name,  the  bank  officials  understand  that  the 
check  is  intended  to  be  deposited,  and  they  will  not 
cash  it. 

6.     If  you  wish  to  make  the  check  payable  to  some 

particular  person  by  indorsing,  write  ''Pay  to 

(name) or  order"  and  under  this  write  your 

own  name  as  you  are  accustomed  to  sign  it. 


DEPOSITS  AND  DEPOSITORS.  151 

-7.  Do  not  carry  around  indorsed  checks  loosely. 
Such  checks  are  payable  to  bearer,  and  may  be  collected 
by  any  one. 

8.  If  you  receive  a  check  which  has  been  transferred 
to  you  by  a  blank  indorsement,  and  you  wish  to  hold  it  a 
day  or  two,  write  over  the  indorsement  the  words  "Pay 
to  the  order  of ( YotiRSELF)     " 

This  is  allowable  legally.  The  check  cannot  be  col- 
lected until  you  indorse  it. 

9.  An  authorized  stamped  indorsement  is  as  good  as 
a  written  one.  Whether  such  indorsements  are  accepted 
or  not  depends  upon  the  regulations  of  the  clearing- 
house in  the  particular  city  in  which  they  are  offered  for 
deposit.  In  New  York  City  and  Chicago  the  use  of 
stamped  indorsements  is  universal.  The  written  indorse- 
ment is  safer  for  transmission  of  out-of-town  collections. 

10.  If  you  are  indorsing  for  a  company,  or  society, 
or  corporation,  write  first  the  name  of  the  company  and 
then  your  own  name  followed  by  the  word  "Treas/^ 

11.  If  you  have  power-of -attorney  to  indorse  for 
some  particular  person,  write  his  name  followed  by  your 
own,  followed  by  the  word  ''Attorney'^  or  "Atty^'  as  it  is 
usually  written. 

12.  Where  checks  are  sent  out  by  the  receiving  (de- 
posit) bank  to  all  parts  of  the  country  for  collection,  it 
is  customary  for  the  bank  to  stamp  upon  the  back  of  the 
check  the  words  "indorsement  guaranteed.'^  Some- 
times a  check  reaches  a  bank  through  responsible  parties, 
who  are  not  its  payees,  without  bearing  the  payee's  in- 
dorsement. The  bank  may  decide  to  pay  without  de- 
manding the  absent  indorsement,  since  suqh  a  demand 


152  DEPOSITS  AND  DEPOSITORS. 

would  cause  considerable  delay  and  trouble,  if  the  pre- 
senter or  the  presentee  of  the  check  guarantees  the  ab- 
sence of  the  indorsement.  This  he  does  by  writing  ''Ab- 
sence of  indorsement  guaranteed/'  with  his  signature,  on 
the  back  of  the  check.  Of  course,  this  i§  practically  a 
guarantee  against  loss  and  trouble  to  the  banker,  which 
might  result  from  the  absence  of  the  indorsement.  The 
banks  of  some  cities  will  not  accept  such  guarantee.  It 
is  sometimes  permissible  to  indorse  the  payee's  name  "by 

(your  own  name)    " 

This  may  be  done  by  a  junior  member  of  a  concern  when 
the  person  authorized  to  indorse  checks  is  absent,  and  the 
checks  are  deposited  and  not  cashed.  If  a  check  lacks 
the  indorsement  of  the  original  payee,  it  may  be  wise,  if 
convenient  to  do  so,  to  get  it  certified  before  sending  it 
back  for  such  indorsement. 

13.  Write  your  check  payable  to  the  order  of  some 
person,  but  don't  write  "Pay  to  the  order  of  James  Gor- 
dpn  Bennett,  for  subscription  to  Herald  for  19 12 J"  Such 
information  on  a  paid  check  may  serve  some  purpose  of 
yours,  but  it  is  not  good  business.  Descriptive  and  qual- 
ifying matter  is  quite  proper  in  the  letter  accompanying 
the  check,  and  if  the  letter  has  been  copied,  it  is  just  as 
legally  valuable. 

14.  Do  not  write  any  unnecessary  information  on  the 
back  of  your  check.  A  story  is  told  of  a  woman  who  re- 
ceived a  check  from  her  husband,  and  when  cashing  it 
wrote  "Your  loving  wife"  above  her  name  on  the  back.* 

Cashing  Your  Own  Check. 
If  you  wish  to  draw  money  from  your  own  account, 
the  most  approved  form  of  a  check  is  written  "Pay  to  the 


DEPOSITS  AND  DEPOSITORS.  153 

order  of  Cash."'  This  differs  from  a  check  drawn  to 
"Bearer."  The  paying  teller  expects  to  see  you  yourself 
or  some  one  well-known  to  him  as  your  representative, 
when  you  write  "Cash."    If  you  write  "Pay  to  the  order 

of (your  own  name)   " 

you  will  be  required  to  indorse  your  own  check  before 
you  can  get  it  cashed. 

Checks  for  Special  Purposes. 

If  you  wish  to  draw  a  check  to  pay  a  note,  write  "Pay 
to  the  order  of  Bills  Payable."  If  you  wish  to  write  a 
check  to  draw  money  for  wages,  write  "Pay  to  the  order 
of  Pay  Roll."  If  you  wish  to  write  a  check  to  pay  a 
draft  which  you  are  buying,  write  "Pay  to  the  order  of 
N.  Y.  Draft  and  Exchange"  or  whatever  the  circum- 
stances may  call  for. 

No  Funds. 

If  you  have  deposited  a  check  and  it  is  returned 
through  your  bank  marked  "No  Funds"  it  signifies  that 
the  check  is  worthless  and  that  the  person  upon  whose  ac- 
count it  was  drawn  has  no  funds  to  meet  it.  Your  bank 
win  charge  the  amount  to  your  account. 

The  best  thing  to  do  in  such  a  case  is  to  hold  the  pro- 
tested check  as  evidence  of  the  debt  and  write  the  person 
who  sent  it  to  you  giving  particulars  and  asking  for  an 
explanation.  There  is  no  advantage  in  having  the  check 
protested  unless  it  has  an  indorser  other  than  yourself. 
One  of  the  bankers'  journals  gives  an  instance  of  a  man 
who  had  a  check  for  $900,  which  he  took  to  get  cashed. 
He  learned  that  the  drawer  had  only  $700  on  deposit, 
and  knowing  that  he    (the  drawer)    was  embarrassed 


154  DEPOSITS  AND  DEPOSITORS. 

financially,  the  man  deposited  to  the  drawer's  credit  $200 
of  his  own  money,  and  then  presented  his  $900  check 
and  had  it  cashed. 

Stopping  Payment. 

If  you  wish  to  stop  the  payment  of  a  check  which  you 
have  issued  you  should  notify  the  bank  at  once,  giving 
full  particulars  of  the  check. 

Canceling  Checks. 

Banks  have  a  custom,  after  paying  and  charging 
checks,  of  canceling  them  by  punching  or  by  making 
some  cut  through  their  face.    These  canceled  checks  are 
returned  to  the  makers  at  the  end  of  each  month. 
Checks  Presented  After  Death. 

As  a  general  rule  banks  are  expected  to  stop  the  pay- 
ment of  a  check  the  signer  of  which  has  died  before  its 
presentation.  This  is  not  always  possible,  for  the  reason 
that  information  as  to  the  death  of  a  customer  may  not 
reach  the  bank  for  days,  so  that  in  reaHty  banks  are 
every  day  paying  checks  of  men  who  are  dead.  In 
Massachusetts,  checks  are  good  for  ten  days  after  the 
death  of  the  signer. 

Checks  Should  Be  Numbered. 
.  Checks  should  be  numbered  so  that  each  can  be  ac- 
counted for.  The  numbers  are  for  your  convenience  and 
not  for  the  convenience  of  the  bank.  It  is  important  that 
your  check-book  be  correctly  kept,  so  that  you  can  tell  at 
any  time  how  much  money  you  have  in  the  bank. 

At  the  end  of  each  month  your  small  bank-book  should 
be  left  at  the  bank  so  that  the  bookkeeper  may  balance  it. 
It  may  happen  that  your  bank-book  will  show  a  larger 
balance  than  your  check-book.    You  will  understand  by 


DEPOSITS  AND  DEPOSITOES. 


155 


this,  if  both  have  been  correctly  kept,  that  there  are 
checks  outstanding  which  have  not  yet  been  presented  at 
your  bank  for  payment.  You  can  find  out  which  these 
are  by  checking  over  the  paid  checks  that  have  been  re- 
turned to  you  with  your  bank-book.  The  unpaid  checks 
may  be  presented  at  any  time,  so  that  your  actual  balance 
is  that  shown  by  your  check-book. 

Checks  should  be  presented  for  payment  as  soon  after 
date  as  possible. 

Certificate  of  Deposit. 
If  you  deposit  money  temporarily  in  a  bank  for  safe 
keeping  you  will  receive  a  receipt  therefor.    This  receipt 


/////^//////r  tf/Zz-^.^/fa^  ySri/rv/jiM  ^ijtMiiiu/iir/u^-J/^///'^/^M/ 
>^//^///,> — A\aK  .'. ////r/f/Af. 


'^*«^^y 


■"^Ui^ 


Certificate  of  Deposit. 

is  usually  called  a  certificate  of  deposit.  See  illustration. 
It  often  occurs  that  such  certificate  is  used  instead  of  a 
bank  draft,  in  the  payment  of  distant  bills.  Interest  is 
allowed  under  certain  conditions.  It  is  practically  a 
bank's  check  on  itself.  In  issuing  certificates  of  deposits 
to  strangers  the  bank  should  take  their  signatures  upon 
the  margin  of  the  certificate  book,  so  that,  when  the  cer- 
tificates come  home  for  redemption,  the  indorsement 
may  be  compared  with  this  original  signature,  if  it  seems 


156  DEPOSITS  AND  DEPOSITORS. 

necessary.  Of  course  every  properly  managed  bank  has 
a  ledger  account  of  certificates  of  deposits  issued,  which 
is  a  full  record  of  the  amounts  and  names  of  all  certifi- 
cates issued,  together  with  their  dates  and  numbers.  Re- 
turning certificates  can  be  compared  with  this  record  as 
they  are  presented  for  payment  through  clearing-houses 
and  over  the  counter. 

Certified  Checks. 

If  you  wish  to  use  your  check  to  pay  a  note  due  at 
some  other  bank,  or  in  buying  real  estate,  or  stocks,  or 
bonds,  you  may  find  it  necessary  to  get  the  check  certi- 
fied. This  is  done  by  an  officer  of  the  bank  who  writes  or 
stamps  across  the  face  of  the  check  the  words  '^Certified" 
or  ''Good  when  properly  indorsed  f  and  signs  his  name. 
(See  illustration.)     The  amount  will  immediately  be  de- 


^^^2e^lHI$     i  I    J  %^^«" ^b^£.J£-^\W 


LincomII^^ 


Pay  to  the  order  oLOi 


:f<w4«^«/^ffrf,     ^|i|^^g. -    Dollars. 


A  Certified  Check. 

ducted  from  your  account,  and  the  bank,  by  guarantee- 
ing your  check,  becomes  responsible  for  its  payment. 
Banks  will  usually  certify  any  check  drawn  upon  them 
if  the  depositor  has  the  amount  called  for  to  his  credit,  no 
matter  who  presents  the  check.  If  you  should  get  a  check 


DEPOSITS  AND  DEPOSITORS.  157 

certified  and  then  not  use  it,  deposit  it  m  your  bank,  oth- 
erwise your  account  will  be  short  the  amount  for  which 
it  is  drawn.  In  Canada,  all  checks  are  presented  to  the 
"ledger  keeper"  for  certification  before  being  presented 
to  the  paying  teller. 

Bank  Drafts. 

Your  bank  check  is  really  your  sight  draft  on  your 
bank.  Of  course  it  differs  from  an  ordinary  commercial 
draft,  not  only  in  its  wording,  but  in  its  purpose.  A 
check  is  used  for  paying  money  to  a  creditor,  while  a 
draft  is  used  as  a  means  of  collecting  money  from  a 
debtor.  The  bank  is  obliged  to  pay  your  check  if  it  has 
funds  of  yours  sufficient  to  meet  it,  while  the  person 
upon  whom  your  draft  is  drawn  may  or  may  not  honor  it 
at  his  pleasure. 

Banks  keep  money  on  deposit  in  one  or  more  other 
banks  located  in  some  of  the  commercial  centers.  Nearly 
all  large  banks  keep  money  on  deposit  with  one  or  more 
of  the  New  York  City  banks.  They  call  these  banks 
their  New  York  correspondents. 

A  bank  draft-  is  simply  the  bank's  check,  drawing  on 
its  deposit  with  some  other  bank.  Banks  sell  these  checks 
to  their  customers.  Merchants  make  large  use  of  these 
drafts,  or  cashier's  checks  as  they  are  sometimes  called, 
in  making  remittances  from  one  part  of  the  country  to 
another.  These  drafts  or  checks  pass  as  cash  anywhere 
within  a  reasonable  distance  of  the  money  center  upon 
which  they  are  drawn.  Banker's  drafts  on  New  York 
would,  under  ordinary  financial  conditions,  be  considered 
cash  anywhere  in  the  United  States. 


158  DEPOSITS  AND  DEPOSITORS. 

A  draft  on  a  foreign  bank  is  commonly  called  a  bill  of 
exchange.  Bills  of  exchange  are  usually  drawn  in  dupli- 
cate, one  of  which  is  forwarded  and  the  other  retained. 
They  are  so  worded  that  when  the  original  is  paid  the 
duplicate  becomes  void.  They  are  drawn  in  the  currency 
of  the  country  where  they  are  made  payable.  These 
drafts  are  used  to  pay  accounts  in  foreign  countries  just 
as  drafts  on  New  York  are  used  to  pay  indebtedness  at 
home. 

"Kiting"  Checks. 

Don't  exchange  checks  to  get  twenty-four  hours' 
credit.    This  is  often  done.    The  banks  call  it  "kiting." 

If  your  bank  finds  that  kiting  is  included  in  your  busi- 
ness methods,  do  not  be  surprised  if  you  are  asked  to 
withdraw  your  account.  Banks  cannot  afford  to  lend 
you  money  even  for  twenty-four  hours  without  interest 
or  security. 

To  illustrate,  suppose  it  is  12  o'clock  noon — after  the 
bank-clearing  at  the  clearing-house.  A  is  short  and 
needs  $500.  He  gives  B  his  check  for  $500  and  takes  B's 
check  for  $500.  B's  check  may  not  be  any  better  than 
A's  but  A  deposits  it  and  has  ample  time  before  three 
o'clock  to  draw  on  the  deposit  and  use  some  of  the  money. 
B  may  do  the  same  with  A's  check.  Other  checks  or  cash 
are  deposited  in  the  m.orning  before  clearing-house 
hours  so  that  the  $500  checks  may  be  met  when  they  come 
in  for  collection.  A  may  accomplish  the  same  end  by 
having  accounts  in  two  banks  and  by  depositing  a  check 
on  the  one  in  the  other. 


DEPOSITS  AND  DEPOSITORS.  159 

Forged  Checks. 
Who  is  liable  when  a  forged  check  has  been  paid?  This 
question  is  often  asked,  and  the  answer  varies  with  cir- 
cumstances. Ordinarily  the  bank  must  stand  the  loss, 
but  if  the  fraud  is  the  result  of  carelessiless  on  the  part  of 
the  person  whose  name  is  forged,  the  bank  is  not  liable. 
Business  men  should  not  only  make  use  of  the  most  ap- 
proved methods  of  protecting  their  checks  but  they 
should  take  every  possible  precaution  to  prevent  im- 
proper use  of  the  blank  forms  by  keeping  them  in  places 
inaccessible  to  anyone  but  those  of  their  own  counting- 
rooms  who  are  authorized  to  write  up  their  checks. 

Signatures. 

In  the  course  of  business  we  often  come  across  very 
queer  specimens  of  writing  and  eccentricities  in  signa- 
tures. A  New  York  Insurance  Company's  Vice-Presi- 
dent has  a  signature,  as  it  appears  on  the  policies  issued 
by  his  company,  which  is  fourteen  inches  one  way  and 
nine  inches  the  other.  In  our  illustration  the  signature 
at  the  top  on  the  left  is  that  of  F.  S.  Watte,  teller  of  an 
Iowa  bank.  Immediately  under  this  name  is  that  of 
John  Mohr,  Jr.,  cashier  of  a  bank  in  Indiana.  Under 
Mohr's  signature  is  that  of  Tom  Randolph,  president  of 
a  bank  in  Texas.  Directly  under  Randolph's  signature 
we  find  a  cross-etching  which  represents  the  treasurer  of 
a  manufacturing  company  in  Connecticut — Hugh  Har- 
bison. It  ranks  high  as  a  curiosity  in  penmanship.  The 
writing  at  the  upper  right-hand  corner  is  that  of  Carmon 
Parse,  cashier  of  a  bank  in  New  Jersey.  The  writing  in 
the  lower  right-hand  corner  filled  the  entire  page  of  a 
letter  sheet.    The  name  is  that  of  Jas.  V.  D.  Westfall. 


160 


DEPOSITS  AND  DEPOSITOES. 


These  specimens  are  interesting,  but  after  all  the  best 
form  of  signature,  and  the  one  most  difficult  to  forge,  is 
that  written  in  a  plain  business  style,  such  as  "John 
Johnston"  in  the  illustration. 


Some  Curious  Signatures. 


Business  men  and  bankers  are  as  thoroughly  familiar 
with  the  signatures  of  other  business  men  as  they  are  with 
their  faces. 


DEPOSITS  AND  DEPOSITORS.  161 

Suggestions  to  Bank  Depositors. 

Don't  exaggerate  your  financial  condition.  The  bank 
has  a  history  of  it  on  its  books. 

Do  not  borrow  money  to  swell  your  deposits. 

Don't  ask  for  special  favors  in  the  way  of  credit;  good 
security  is  all  the  bank  asks.  Your  intercourse  with 
bank  officers  should  be  candid  and  courteous. 

Make  your  deposit  as  early  in  the  day  as  possible. 
Never  exchange  checks  to  make  large  deposits.  Never 
make  deposits  without  your  bank  book.  Avoid  unneces- 
sary conversation  with  the  clerks. 

Make  it  an  invariable  rule  to  give  checks  only  out  of 
your  own  check  book.  Never  give  out  checks  dated 
ahead.  Always  consider  a  check  paid  when  you  give  it 
out  and  mark  the  amount  from  your  balance. 

Let  all  your  dealings  be  strictly  honorable. 


I.B.L.   Vol.  4— Jl 


NO -'S 

Chicago,  ili is 

jofter  date, — ^ promise   to  pay  to  the  order  of 


The  First  Natioi 


Bank  of  Chicago. 


DOLLARS, 


With  interest  at  Seven  peMdhit^er  annum  after  due,  at  the  office  of  said  Bank.  Value 
received.  In  ease  of  the  M.SoLvency  of  the  undersigned  any  indebtedness  due  from  the 
legal  holder  hereof  to  tMf  undersigned  may  be  apj)ropriated  and  appUeAl  hereon  at  any 
time,  at  well  before  aahfter  the  maturity  hereof. 


Demand  Note, 


THE 

First  National  Bank 
OF  Chicago 


Application  for  Draft. 


CHAPTER  IX. 

NOTES  AND  DRAFTS. 

Promissory  Notes. — A  promissory  note  is  a  written 
promise  to  pay  a  specified  sum  of  money.  At  the  time 
of  the  note's  issue,  that  is,  when  signed  and  dehvered,  two 
parties  are  connected  with  it:  the  maker  and  the  payee. 
The  maker  is  the  person  who  signs  or  promises  to  pay 
the  note,  and  the  payee  is  the  person  to  whom  or  to  whose 
order  the  note  is  made  payable. 

Negotiable  in  a  commercial  sense  means  transferable 
and  a  negotiable  note  is  a  note  which  can  be  transferred 
from  one  person  to  another.  A  note  to  be  made  nego- 
tiable must  contain  the  word  order  or  the  word  bearer, 
that  is,  it  must  be  payable  either  to  bearer  or  to  the  order 
of  the  payee. 

A  non-negotiable  note  is  payable  to  a  particular  per- 
son only. 

A  note  may  be  written  on  any  kind  of  paper  in  ink  or 
in  pencil. 

Date  of  a  Note. 
The  date  of  a  note  is  a  matter  of  the  first  importance. 
Some  bankers  and  business  men  now  consider  it  better  to 
draw  notes  and  time  drafts  payable  at  a  certain  fixed 
time;  as,  ''I  promise  to  pay  on  the  10th  of  March,  19 IS.'* 
The  common  custom,  however,  is  to  make  notes  payable 
a  certain  number  of  days  or  months  after  date. 
A  note  made  and  issued  on  Sunday  is  void. 
163 


164  NOTES  AND  DRAFTS. 

The  day  of  maturity  is  the  day  on  which  a  note  be- 
comes legally  due.  In  most  of  the  states  a  note  is  not 
legally  due  until  three  days,  called  days  of  grace^  after 
the  expiration  of  the  time  specified  in  the  note. 

The  words,  ^'without  defalcation^^  are  inserted  in 
Pennsylvania  notes. 

"Value  Received.** 

These  words  are  not  legally  necessary,  although  they 
usually  appear  on  ordinary  promissory  notes.  Thou- 
sands of  good  notes  made  without  any  value  considera- 
tion are  handled  daily. 

'Sao 


^AlnAtl^A^.y.^n  Jm 


/^y^:^M/^ ^kaKitti  4\'Ki!ktn\A 


y^ 


JufeU-lUA/TA  dtv  erL 


fffiUntfi  nk-)L,  7\tnx}L 


.yjpjLui^m^y^         .^^-^ttijjii:ip^^^^ 


A  Promissory  Note. 

The  promise  to  pay  of  a  negotiable  note  must  be  un- 
conditional. It  cannot  be  made  to  depend  upon  any 
contingency  whatever.  A  note  made  payable  in  any- 
thing but  money  is  simply  a  form  of  contract  and  is  not 
a  negotiable  instrument. 

Accommodation  Paper. 

Notes  and  acceptances  that  are  made  in  settlement  of 
genuine  business  transactions  come  under  the  head  of 
regular,  legitimate  business  paper.  An  accommodation 
note,  or  acceptance,  is  one  which  is  signed,  or  indorsed,  or 
accepted,  simply  as  an  accommodation,  and  not  in  settle- 


NOTES  AND  DRAFTS.  165 

ment  of  an  account  or  in  payment  of  an  indebtedness.      < 

With  banks,  accommodation  paper  has  a  deservedly 
hard  reputation.  However,  there  are  all  grades  and 
shades  of  accommodation  paper,  though  it  represents  no 
actual  business  transaction  between  the  parties  to  it,  and 
rests  upon  no  other  foundation  than  that  of  mutual 
agreement. 

No  contract  is  good  without  a  consideration,  but  this 
is  only  true  between  the  original  parties  to  a  note.  The 
third  party  or  innocent  receiver,  or  holder  of  a  note,  has 
a  good  title,  and  can  recover  its  value,  even  though  it  was 
originally  given  without  valuable  consideration. 

An  innocent  holder  of  a  note  which  had  been  originally 
lost  or  stolen,  has  a  good  title  to  it,  if  he  received  it  for 
value. 

Interest  Notes. 

A  note  does  not  draw  interest  until  after  maturity,  un- 
less the  words  with  interest  appear  on  the  face.    Notes 


r  ^z:,.J^m^ 


An  English  Note  of  Hand. 


166  NOTES  AND  DRAFTS. 

draw  interest  after  maturity  and  until  paid,  at  the  legal 
rate. 

Indorser  of  a  Note. 

An  indorser  of  a  note  is  any  person  who  writes  his 
name  on  the  back  of  it,  and  by  so  doing  guarantees  its 
payment.  Indorsements  on  notes  are  usually  made  in 
blank,  that  is,  without  the  words  "Pay  to  the  order  of." 
The  receiver  of  the  note  is  then  free  to  indorse  it  or  not  at 
his  pleasure  if  he  wishes  to  transfer  it. 

The  indorser  is  liable  for  its  pajnnent  if  the  maker  fails 
to  meet  it.  If  an  indorser  should  be  compelled  to  pay  a 
note  he  has  a  good  claim  against  the  maker,  and  against 
each  indorser  whose  name  appears  above  his  own. 

An  indorser  to  whose  order  a  note  is  drawn  or  in- 
dorsed, can  transfer  it  without  becoming  liable  for  its 
payment  by  writing  the  words  "without  recourse"  be- 
fore or  after  his  name  on  the  back. 

A  person  who  receives  a  promissory  note  in  good  faith 
for  fair  value  before  the  day  of  maturity,  takes  it  free 
from  aU  defects  of  title  and  from  all  claims  that  might 
be  set  up  against  any  preceding  holder.  This  is  not  true 
of  notes  transferred  after  maturity. 

Presentation  for  Payment. 

A  note  should  be  presented  on  the  exact  day  of  matur- 
ity. Notes  made  payable  at  a  bank  or  at  any  other  place, 
must  be  presented  for  payment  at  the  place  named. 
When  no  place  is  specified  the  note  is  payable  at  the 
maker's  place  of  business  or  at  his  residence. 

The  note  must  not  be  presented  before  or  after  ma- 
turity but  upon  the  exact  day  of  maturity  if  the  indorsers 
are  to  be  held  liable  for  its  non-payment. 


NOTES  AND  DRAFTS.  167 

Protest. 

When  a  note  is  presented  for  payment  at  maturity  and 
is  not  paid,  it  is  usually  protested,,  that  is,  a  notary  pubhc 
makes  a  formal  statement  that  the  note  was  presented 
for  payment  and  payment  was  refused.  Notice  of  such 
protest  is  sent  to  the  maker  and  to  each  indorser. 

The  bank  should  never  hand  to  its  notary  any  paper 
for  protest  until  it  has  made  sure  that  its  non-payment 
has  not  been  brought  about  by  some  error  or  misunder- 
standing. Quite  often,  even  though  the  paper  has  been 
made  payable  at  a  bank,  the  notary  sends  a  messenger 
with  the  note  to  the  maker  to  make  a  formal  demand  for 
payment. 

In  taking  in  collection  paper,  banks  should  obtain  clear 
instructions  from  its  owners  as  to  whether  or  not  it 
should  be  protested  in  case  of  non-payment.  It  by  no 
means  follows  that  a  formal  protest  is  not  desired  because 
the  paper  bears  no  indorsements.  Many  banks  make  it  a 
rule  to  protest  all  unpaid  paper  unless  otherwise  ordered. 

Date  of  Maturity. 
In  finding  the  date  of  maturity  it  is  important  to  re- 
member that  when  a  note  is  drawn  days  after  date  the 
actual  days  must  be  counted,  and  when  drawn  months 
after  date  the  time  is  reckoned  by  months. 

Payment  on  a  Note. 
If  a  payment  is  made  to  apply  on  a  note,  such  pay- 
ment should  always  be  indorsed  on  the  back  of  the  note. 
Such  indorsement  requires  no  signature.  The  usual  form 
is  to  give  the  date  and  write  "Received  on  within  note,'* 
stating^  the  amount.    An  ordinary  separate  receipt  is  not 


168  NOTES  AND  DRAFTS. 

sufficient.    Each  amount  indorsed  on  the  back  reduces 
the  face  value. 

A  Joint  Note. 
A  note  having  two  or  more  makers  is  called  a  joint 
note.  If  written  "We  jointly  and  severally  promise  to 
pay,"  either  maker  is  individually  liable  for  the  whole 
amount  if  the  other  does  not  pay  his  share;  if  written, 
"We  promise  to  pay,"  each  is  liable  for  his  one-half. 

A  note  written  "I  promise  to  pay"  and  signed  by  two 
or  more  persons  is  a  joint  individual  note. 

Signature  to  a  Note. 

The  maker's  signature  to  a  note  must  appear  in  some 
form  upon  some  part  of  the  paper.  It  may  be  affixed 
by  himself  or  his  authorized  agent,  and  it  may  be  the  full 
name  or  the  initials  only. 

Commercial  Drafts. 

A  commercial  draft  is  really  a  letter  from  one  person 
to  another  requesting  that  a  certain  sum  of  money  be 
paid  to  the  person  who  calls,  or  to  the  bank  or  firm  for 
whom  he  is  acting.  Conmiercial  usages  recognize  a  par- 
ticular form  in  which  this  letter  is  written  and  the  ad- 
dress of  the  person  for  whom  it  is  intended  is  usually 
written  at  the  lower  left-hand  corner  instead  of  on  an 
envelope. 

Commercial  drafts  are  sent  through  the  banks  instead 
of  directly  through  the  mail.  For  instance,  if  A  of  Bos- 
ton owes  B  of  New  York  $100,  B  may  draw  on  A  for  the 
amount.  He  may  deposit  the  draft  in  a  New  York  bank 
to  be  forwarded  or  he  may  mail  it  himself  to  a  Boston 


NOTES  AND  DRAFTS. 


169 


bank  for  collection.  When  the  draft  reaches  the  Boston 
bank,  a  messenger  will  carry  it  to  A.  If  it  is  a  sight 
draftj  that  is,  if  B  wants  the  money  paid  at  sight,  imme- 
diately, A  may  give  the  money  to  the  messenger  and 
take  the  draft  as  his  receipt.  If  it  is  a  time  drafts  that  is, 
if  B  gives  A  time,  a  certain  number  of  days  in  which  to 
pay  the  draft,  A  accepts  it.  He  does  this  by  writing 
the  word  accepted  with  the  date  and  his  signature  across 
the  face  of  the  draft.    He  then  returns  the  draft  to  the 


e^^^^jXl 


m»-^^H— 


An  Accepted  Draft. 

messenger  and  it  is  returned  to  B.  An  accepted  draft  is 
really  a  promissory  note,  though  it  is  often  called  an  ac- 
ceptance. When  a  man  pays  or  accepts  a  draft  he  is  said 
to  honor  it.  In  this  instance  A  is  not  obliged  either  to 
pay  or  to  accept  the  draft.  It  is  not  binding  on  him  any 
more  than  a  letter  would  be.  But,  if  he  refuses  to  honor 
legitimate  drafts,  it  may  injure  his  credit  with  the  banks 
and  other  business  houses. 

Collections  by  Draft. 

It  is  a  very  conmion  thing  to  collect  distant  accounts 

by  means  of  commercial  drafts.    A  debtor  is  more  likely 

to  meet  a  draft  than  he  is  to  reply  to  a  letter  and  inclose 

his  check.    It  is  really  more  convenient  and  safer  too,  for 


170  NOTES  AND  DRAFTS. 

there  is  some  risk  in  sending  personal  checks  through  the 
mails.  There  are  some  houses  that  make  all  their  pay- 
ments by  check,  while  there  are  others  that  prefer  to  have 
their  creditors  at  a  distance  draw  on  them  for  the 
amounts  due. 

If  a  business  man  who  is  accustomed  to  honor  drafts 
continues  for  a  period  to  dishonor  them,  the  banks 
through  which  the  drafts  pass  conclude  that  he  is  unable 
to  meet  his  payments.  Circumstances  of  this  character 
have  a  tendency  to  injure  one's  credit. 

The  messenger  from  a  bank  who  presents  a  sight  draft 
is  not  authorized  to  accept  a  check  in  payment,  but  the 
person  upon  whom  the  draft  is  drawn  may,  if  he  chooses, 
write  across  the  face,  ''Accepted,  July  — ,  19 — ,  payable 
at  First  National  Bank"  and  under  this  write  his  name. 
Such  a  draft  is  then  really  a  check — an  order  on  his  bank 
to  pay  the  amount  due  for  him,  and  the  particulars  must 
be  entered  in  the  check-book  just  the  same  as  though  an 
actual  check  had  been  issued. 

Some  houses  deposit  their  drafts  for  collection  in 
their  home  banks,  while  others  have  a  custom  of  sending 
them  direct  to  some  bank  in  or  near  the  place  where  the 
debtor  resides.  If  the  place  is  a  very  small  one  the  col- 
lection may  be  made  through  one  of  the  express  com- 
panies. 

Draft  Notioes. 

Wljen  goods  are  sold  for  distinct  periods  of  credit  and 
it  is  generally  understood  that  maturing  accounts  are 
subject  to  sight  drafts,  there  really  should  be  no  need 
of  notifying  the  debtor  in  advance  of  drawing.  Some 
houses,  however,  make  a  general  custom  of  sending  noti- 


NOTES  AND  DRAFTS.  171 

ces  ten  days  in  advance  stating  that  drafts  will  be  drawn 
if  check  is  not  received  in  the  meantime.  These  notices 
may  be  often  seen  printed  at  the  foot  of  statements  sent 
out  on  the  first  of  the  month. 

When  are  Accounts  Due? 

Custom  has  made  some  rules  which  are  now  considered 
absolute  by  the  best  business  houses.  On  general  month- 
ly credit  accounts,  all  goods  bought  during  the  month  are 
due  on  the  first  day  of  the  month  following  and  may  be 
paid  any  time  between  the  first  and  the  tenth.  Goods 
sold  for  cash  should  be  paid  for  at  once  or  within  ten  days 
from  the  date  of  sale. 

If  a  discount  is  allowed  for  cash  that  discount  can  be 
claimed  and  is  usually  allowed  if  payment  is  made  within 
10  days.  Goods  bought  on  March  3  at  30  days  would 
be  due  April  3  plus  10  days,  or  April  13.  That  is  to 
say,  if  a  discount  were  allowed  for  payment  within  30 
days  the  discount  could  be  claimed  if  payment  were  not 
made  until  April  13. 

It  is  a  common  custom  to  date  sales  ahead,  to  the  first 
of  the  next  month,  or  sometimes  two  or  three  months 
ahead.  The  dates  of  drafts  then  conform  to  the  general 
custom  of  credits. 

Collections  Through  Banks. 
If  you  desire  to  have  your  bills  receivable  and  commer- 
cial drafts  collected  through  a  bank,  yoii  should  place 
them  with  the  bank  at  least  fifteen  days  before  maturity. 
About  ten  days  before  maturity  the  bank  will  send  to  the 
maker  a  formal  notice  stating  that  they  hold  a  note 
against  him,  giving  the  amount  and  date  of  maturity, 
and  asking  him  to  call  and  pay  it. 


172  •  NOTES  AND  DRAFTS. 

When  a  note  is  left  at  a  bank  for  collection,  it  should 

be  indorsed  ''Collected  for  account  of ."    By 

this  indorsement  the  note  is  not  transferred  to  the  bank. 
The  bank  is  simply  authorized  to  collect  the  amount. 

Three-Party  Draft. 

If  the  drawer  of  a  draft  owes  some  one  in  the  same 
city  with  the  person  upon  whom  he  draws,  that  is,  if  he 
has  a  creditor  and  a  debtor  in  the  same  city,  he  can  draw 
on  the  debtor  in  favor  of  the  creditor  and  forward  the 
draft  by  mail  to  the  creditor.  The  creditor  will  deposit 
it  for  collection  in  the  ordinary  way,  usually  after  in- 
dorsing it. 

"No  Protest." 

We  often  see  attached  to  the  end  of  a  draft  a  little  slip 
with  the  words  'Wo  Protest;  tear  this  off  before  present- 
ing/' This  is  simply  private  advice  to  the  banker  in- 
forming him  that  the  drawer  does  not  wish  to  have  the 
draft  protested.  It  may  be  that  he  does  not  wish  to 
wrong,  or  injure  the  credit  of,  or  add  to  the  expense  of 
his  debtor,  or  it  may  be  that  he  considers  the  account 
doubtful  and  does  not  wish  to  add  to  his  own  loss  that  of 
protest  fees. 

Discounting  Drafts. 

It  is  a  common  thing  to  have  drafts  discounted  before 
they  are  accepted.  For  instance,  a  wholesale  merchant 
may  have  accounts  out  amounting  to  $100,000  and  he 
may  need  immediate  working  capital.  He  draws  on  his 
customers  and  sells  his  drafts  to  a  bank  either  directly 
or  through  a  note  broker.  The  amount  of  discount  de- 
pends upon  the  money  market.  The  drafts  are  as  good 
as  one-name  notes.    Some  of  them,  of  course,  will  be  dis- 


NOTES  AND  DRAFTS.  173 

honored,  but  these  are  met  by  the  drawer  as  soon  as  re- 
turned, or  he  may  set  aside  an  agreed-upon  percentage 
of  the  entire  amount  to  cover  the  drafts  hkely  to  be  re- 
turned. 

Drafts  attached  to  bills  of  lading  and  other  securities 
are  frequently  discounted  when  placed  in  the  hands  of 
the  bank.  Such  drafts  are  usually  drawn  at  sight  or  at 
one  day. 

Advantages  of  Taking  a  Note. 

It  is  generally  understood  that  a  debtor  is  more  likely 
to  pay  a  promissory  note  than  he  is  to  keep  a  simple 
verbal  promise.  It  will  injure  his  credit  if  he  allows 
his  paper  to  go  to  protest.  It  is  difficult,  too,  to  dispute  a 
claim  after  a  note  has  been  given  in  settlement.  The 
note  may  also  be  used  by  the  creditor  in  raising  money 
for  his  own  use;  that  is,  he  may  get  it  discounted — sell 
it  to  a  note  broker  or  to  a  bank. 

But  there  are  some  disadvantages.  If  a  note  is  ac- 
cepted from  a  debtor  the  account  cannot  be  collected  un- 
til the  day  of  maturity  of  the  note.  You  may  hold  a 
note  against  a  debtor,  and  if  your  note  is  not  due,  you 
cannot  by  any  process  of  law  prevent  your  debtor  from 
selling  everything  he  owns  and  leaving  for  parts  un- 
known. 

A  note  that  is  overdue  is  in  some  particulars  better 
than  a  note  not  yet  matured.  An  overdue  note  draws 
interest  at  the  legal  rate  from  the  date  of  maturity  and 
legal  steps  to  collect  it  may  be  taken  at  any  moment. 

Discounting  Paper. 
To  discount  a  note  or  draft  is  to  sell  it  at  a  discount. 
The  rates  of  discount  vary  according  to  the  security 


174  NOTES  AND  DRAFTS. 

offered,  or  the  character  of  the  loan,  or  the  state  of  the 
money  market.  For  ordinary  commercial  paper  the 
rates  run  from  4  to  8  per  cent.  Notes  received  and  given 
by  commercial  houses  are  not  usually  for  a  longer  per- 
iod than  four  months. 

Drafts  and  Bills  of  Lading. 

The  use  made  of  commercial  drafts  in  connection  with 
bills  of  lading  is  quite  interesting.  For  instance,  the 
hve  cattle  are  paid  for  in  Texas  by  the  proceeds  of  a 
draft,  with  bill  of  lading  attached,  upon  Chicago,  where 
they  are  slaughtered.  Bills  of  lading  for  the  dressed 
beef  shipped  East  are  accompanied  by  drafts  on  New 
York,  and  the  shipment  per  steamer  to  Liverpool  or 
Glasgow  is  drawn  against,  in  sterling,  upon  London. 
The  latter  draft  is  sold  to  a  New  York  banker,  who  in 
turn  draws  against  it  in  favor  of  merchants  who  are 
buying  foreign  exchange. 

Protest  Notice. 

The  student  will  notice  the  copy  of  a  protest  notice 
— the  form  used  by  notaries  in  Massachusetts.  An  il- 
lustration is  given  of  a  protested  note  stamped  (in  red 
or  some  other  color)  by  the  notary.  The  number  is  the 
clearing-house  number  of  the  bank. 


(m?^  fYKffvTtM. 


(HriUAct^.^    fVlf.il  :^.  y/a/^ 


ii|iWi£iiWStiM. 


(P..^.>.p.  »Jt."Vt^ANK  OF  THg  gEPUBUC^ 


A  Protested  Note. 


NOTES  AND  DRAFTS. 


175 


nillKM  BRIGG3.  Nounr  PMh. 


(^ommomveaUh  of  QSIIassacHtuEefis. 


Jm^m^mm*^^^*^^,  L  VeRNON  BrIGGS,  |totar]!  f nbIit,-s^5'/*'A*yw,«^ 

/^  ^  (^Uw*«»^«^(%^>'<!a^ /mmSm^  mel,<€u^  ^<8*am.  ,i^a, tf«^«»«///^ 


A  Protest  Notice — Massachusetts  Form. 


176  NOTES  AND  DRAFTS. 

Overdue  Paper. 

Negotiable  paper,  whether  made  for  accommodation 
or  otherwise,  may  be  transferred  by  indorsement  and  de- 
livery or  by  delivery  alone  either  before  it  has  fallen  due 
or  afterward.  There  is  a  difference,  however,  in  the  lia- 
bility attached  to  indorsers,  and  the  value  of  the  paper 
may  be  affected  by  the  defenses  existing  between  the 
original  parties.  It  would  be  well  to  consult  a  lawyer  be- 
fore accepting  overdue  paper,  particularly  if  it  has  in- 
dorsers. 

Who  is  a  Bona-fide  Holder? 

If  the  indorsee  or  holder  of  a  note  has  no  notice  at  the 
time  he  receives  it,  of  any  facts  or  circumstances  that 
would  prevent  any  of  the  parties  to  the  paper  before 
him  from  recovering  the  whole  amount,  he  is  a  bona  fide 
or  innocent  holder,  and  if  he  has  paid  for  the  note,  he 
is  a  holder  for  value^  and  can^xecover  its  full  face. 

An  alteration  or  change  in  some  material  part  of  a 
promissory  note,  by  a  party  to  it,  makes  the  paper  void 
as  regards  all  parties  except  those  who  assent  to  the 
change.    Adding  an  interest  rate  is  a  change. 

A  Set-off. 

If  a  man  has  a  claim  against  you  and  you  have  also 
a  claim  against  him,  you  call  your  claim  a  set-off ^  that  is 
something  to  set  or  cancel  off  part  or  all  of  his  claim. 
Under  ordinary  conditions  it  is  impossible  to  have  a 
set-off  against  a  note  not  in  the  hands  of  the  original 
payee. 

Notice  of  Non-payment  of  a  Note. 

If  the  note  has  been  discounted  or  is  in  a  bank  for 
collection,  the  bank  will  send  notice  to  the  indorsers  to 


NOTES  AND  DRAFTS.  177 

the  effect  that  the  note  has  been  presented  for  payment 
and  payment  was  refused.  If  the  note  is  in  the  holder's 
hands  and  payment,  upon  presentation,  has  been  refused, 
the  holder  should  immediately  send  a  written  notice  to 
the  indorser,  if  any,  stating  that  a  certain  note  made  by 

,  for  ,  in  favor  of  dated  , 

and  "by  you  indorsed"  was  "this  day  presented  to 


for  payment,  and  payment  was  refused."     Such  notice 
may  be  sent  by  mail. 

A  "Mark"  Signature. 
When  a  man  who  cannot  write  is  asked  to  sign  a  deed 
or  mortgage  or  other  legal  document,  the  usual  custom 
is  to  have  him  affix  a  cross  as  in  the  illustration,  some  one 


doing  the  writing  for  him.  Such  a  signature  should  be 
witnessed.  (See  illustration.)  An  indorsement  of  this 
kind  is  legal  and  is  quite  common.  There  are  no  legal 
rules  governing  the  shape  of  the  mark. 

An  Important  Provision. 
A  very  important  provision  of  the  National  Bank  act 
is  as  follows:  "No  bank  shall  loan  or  discount  on  the  se- 
curity of  shares  in  its  own  capital  stock  unless  such  se- 

I.B.I..  Vol.  4—12 


178  NOTES  AND  DEAFTS. 

curity  or  purchase  shall  be  necessary  to  prevent  loss  upon 
a  debt  previously  contracted  in  good  faith." 

Power  of  Attorney. 

To  give  some  one  else  the  power  to  sign  or  indorse 
checks,  notes,  or  other  important  papers,  is  called  giving 
such  a  one  power  of  attorney^  that  is,  the  power  or  au- 
thority to  be  your  attorney.  Such  authority  when  given 
should  state  explicitly  what  the  attorney  has  power  to 
do. 

The  Post-Office  department  issues  a  printed  blank  for 
use  by  those  who  wish  to  transfer  to  others  the  power  to 
sign  money  orders. 

Powers  of  this  sort  should  be  filed  with  the  post-office, 
or  bank  interested,  or  should  be  made  matters  of  pubhc 
record  at  the  office  of  the  register  of  deeds.  The  stu- 
dent will  find  on  the  next  page  a  power  of  attorney  from 
Daniel  Webster  to  Mrs.  Webster  giving  her  authority 
to  draw  and  sign  checks.  This  document  appeared  in 
Rhodes'  Journal  of  Banking  and  was  taken  from  the  files 
of  the  bank  where, it  was  actually  used  by  Mrs.  Webster. 

The  Return  of  Vouchers. 

Banks  usually  return  to  promisors  and  acceptors  all 
the  paper  which  they  have  collected.  When  you  pay  a 
note  or  draft  you  expect  to  receive  the  canceled  note  or 
draft  in  exchange  for  the  money  which  you  pay.  In  the 
same  way  paid  checks  are  returned  to  the  drawers  of 
them,  at  the  end  of  each  month.  This  rule  is  not  gener- 
,ally  followed,  however,  between  banks  and  their  corres- 
pondents. 

The  canceled  note  or  draft  which  you  receive  should 
not  be  destroyed.    It  may  serve  as  an  important  voucher. 


NOTES  AND  DRAFTS.  179 

A  good  plan  is  to  tear  the  signature  through  the  middle 
and  destroy  the  torn-off  piece.  The  note  is  then  destroy- 
ed as  a  credit  instrument  but  remains  sufficiently  com- 
plete to  serve  as  a  voucher. 


A  Power  of  Attorney  Given  by  Daniel  Webster. 

Due  Bills. 

A  due  bill  is  an  acknowledgment  and  evidence  of  a 
debt.  It  may  be  payable  in  money  or  in  merchandise. 
The  ordinary  form  of  due  bill  is  not  negotiable. 


180  NOTES  AND  DRAFTS. 

How  Notes  Differ  from  Other  Contracts. 
There  are  three  pecuharities  which  distinguish  promis- 
sory notes  from  ordinary  written  contracts. 

1.  Notes  are  negotiable. 

2.  There  is  no  statement  in  a  note  of  consideration. 

3.  There  are  no  days  of  grace  allowed  on  ordinary 
contracts. 

A  note  must  have  a  clear  promise  to  pay,  without  any 
attached  conditions.  The  time  must  be  certain,  that  is, 
it  must  not  depend  upon  the  happening  of  some  uncer- 
tain event. 

Legal  Tender. 

In  making  money  payments  it  is  necessary  often,  or 
if  the  receiver  demands  it,  to  make  payment  in  legal  ten- 
der, that  is,  in  the  form  of  money  required  by  law.  For 
instance  you  cannot  pay  an  account  of  $18  in  ten-cent 
prices,  if  the  creditor  refuses  to  accept,  for  the  reason 
that  silver  coins  of  smaller  denomination  than  one  dollar 
are  legal  tender  only  in  all  sums  not  exceeding  $10. 

Note  Brokers. 

Merchants  sell  a  great  many  of  their  notes  in  the  open 
market,  that  is,  to  note  brokers.  The  banks  buy  these 
notes  from  the  note  brokers.  The  assistance  of  the  broker 
who  handles  commercial  paper  is  a  necessary  and  valu- 
able aid  to  the  purchasing  bank.  Fully  seven-eighths  of 
all  paper  purchased  by  New  York  city  banks  is  pur- 
chased upon  the  simple  recommendation  of  the  note  brok- 
ers. As  a  rule  these  brokers  simply  transfer  the  paper 
without  guaranteeing,  by  indorsement,  ks  payment. 
Notes  bought  by  banks  from  note  brokers  without  their 


NOTES  AND  DRAFTS.  181 

indorsement  are  held  to  be  guaranteed  by  them  to  be  all 
right,  in  all  points  except  that  which  covers  the  question 
of  whether  they  will  be  paid  or  not.  The  bank  uses  its 
best  judgment  in  taking  the  risk. 

If  the  note  dealer,  in  selling  notes  to  a  bank,  makes 
what  he  believes  to  be  fair  and  honest  representations  re- 
garding any  particular  paper,  statements  of  such 
straightforward  type  that  upon  them  no  charge  of  false 
pretenses  can  be  made  to  rest,  he  simply  guarantees  the 
note  geniune  as  to  names,  date,  amount,  etc.,  and  that,  in 
selling  it,  he  conveys  a  good  title  to  the  paper.  As  busi- 
ness men,  however,  they  are  very  cautious,  and  are  ex- 
ceedingly anxious  that  the  paper  they  sell  shall  be  paid, 
and  as  a  rule  they  make  good  any  losses  which  grow  out 
of  apparent  misrepresentations  on  their  part. 

Single-na^e  Paper. 
The  custom  of  issuing  single-name  paper  has  grown 
largely  of  late.  The  maker  is  the  borrower,  and  the 
buyer  must  consider  his  personal  credit  when  making  the 
purchase.  It  is  estimated  that  two-thirds  of  all  the  paper 
bought  by  New  York  city  banks  is  single-name.  Such 
paper  makes  no  pretense  to  be  anything  else  but  what  it 
appears,  a  simple  promise  to  pay,  and  in  this  it  differs 
from  accommodation  paper.  Genuine  double-name 
paper  consists  of  notes  given  in  actual  payments  of  mer- 
chandise sales. 

Demand  Collateral  Note. 
An  illustration  is  given  of  a  demand  collateral  note. 
The  bank  loans  money  payable  on  demand  and  accepts, 
in  this  instance,  railroad  stock  as  security.    The  stock  is 


182  NOTES  AND  DRAFTS. 

held  by  the  bank  until  the  note  is  paid,  and  if  not  paid, 
the  stock  becomes  the  property  of  the  bank. 


av 


.alio  date,     V\r£~..  praame  lo  pijr  lo  die  oider  of 


"rttc  TcnlH-NaTionA\  BanK__fiV-PORTLANlX. 


&ukJU(,  litfo  'Sui/vt.tiAjcxL  -    -  -  .  Ooujuts. 

vitb  Interesi  from  dale,  without  defalcauon.  (or  Talue  recrive<f .  and  have  delivered  «ntb  (bh  ooie.  as  collateni  tecniity, 


^P/>^..iSft 


Demand  Collateral  Note. 

Waiver  of  Demand  and  Notice. 
All  indorsed  demand  notes  held  by  a  bank  should  start 
with  a  waiver  of  demand  and  notice  by  the  indorser, 
since  in  time  (in  some  states  in  60  days)  indorsers  are 
lost — unless  a  demand  for  payment  is  made  upon  pro- 
misors— if  this  precaution  has  not  been  attended  to. 

A  Judgment  Note. 

Some  of  the  states,  noticeably  Pennsylvania,  have  a 
form  of  promissory  note  called  a  judgment  note.  In 
this  form  of  note  the  maker  confesses  judgment  if  the 
note  is  not  paid  and  authorizes  the  court  to  take  possess- 
sion  of  sufficient  of  his  property  immediately  to  satisfy 
the  amount  of  the  claim.  It  is  really  a  very  severe  form 
of  contract  and  should  be  given  only  under  the  most  ex- 
treme conditions. 

Collection  Laws. 

An  edtachment  is  a  writ  issued  at  the  commencement 
of,  or  during  a  suit  at  law  in  court,   commanding  the 


NOTES  AND  DRAFTS.  183 

sheriff,  or  other  proper  officer,  to  attach  the  property  of 
the  defendant,  to  satisfy  the  demands  of  the  plaintiff. 
The  property  of  corporations  may  be  attached  as  well  as 
that  of  individuals.  By  this  prppess  the  plaintiff  gains  a 
lien  on  the  attached  property,  which  lien  will  await  the 
judgment  of  the  court  in  the  suit.  In  many  of  the  states 
the  defendant  may  dissolve  the  attachment  by  giving  a 
bond,  with  sureties,  that  he  will  pay  such  judgment  as  the 
plaintiff  may  obtain  in  the  suit. 


9  titCoflV:;^^.   fi*^...^^ 


r,  v<ih  int^reMtt    And  do  Hereby  ettthnrlie  any  Altorney  of  thU  CnQftty,  oi  any  other  Couaty  In  tbia  State,  or  else* 

miMS  JudgmeM  tor  the  ahwe  aam,  wKh  cnata  ol  aull  and  Altocney'i  commtnlon  of  five  per  ctai  (or  collec'.ion.  releaae 

t  atay  of  execution,  and  do  waive  thf  right  and  benefit  ol  any  law  ol  this  or  any  other  State  exemptlnx  iir<3perty,  real 

.-    .  f  right  aiuHiKit^ialtloii,  and  coBMnlio  the  coiKlemnaUo«ll»fr»ot>»i»h 


Ih»» 


:>s. 


A  Judgment  Note. 

A  suit  is  ended  by  the  court's  giving  a  final  judgment, 
either  for  the  plaintiff  or  for  the  defendant,  at  the  same 
time  fixing  the  amount  in  dispute,  if  judgment  is  for 
the  plaintiff. 

Execution  is  the  act  of  carrying  into  effect  the  final 
judgment  of  a  court.  If  property  of  any  kind  is  sold 
under  execution,  the  proceeds  go  to  satisfy  the  judg- 
ment and  any  costs  or  charges ;  and  then,  if  there  is  any 
surplus,  it  belongs  to  the  defendant.  By  the  homestead 
and  exemption  laws  of  many  states,  certain  kinds  and 
amounts  of  property  are  exempted  from  attachment  and 


184  NOTES  AND  DRAFTS. 

sale  on  execution.  By  garnishment  or  trustee  process  is 
meant  the  attaching  of  money  or  goods,  due  a  defendant, 
in  the  hands  of  a  third  person. 

By  exemption  is  meant  the  right  given  by  law  to  a 
debtor  to  retain  a  portion  of  his  property  free  from  a 
sale  on  execution  at  the  suit  of  a  creditor. 


CHAPTER  X. 

CREDIT  AND  EXCHANaE. 

It  is  to  credit  alone  that  we  are  indebted  for  that  inter- 
mediate agent  which  plays  so  important  a  part  in  the 
transaction  of  business,  whether  it  be  in  causing  supply 
and  demand  to  meet,  or  in  applying  to  the  industry  of 
exchange  the  principle  of  the  division  of  labor  which 
is  so  favorable  to  production. 

Without  credit  this  intermediary  is  impossible  in  most 
instances.  It  gives  birth  to  both  industry  and  trade. 
It  multiplies  the  producing  and  consuming  power  of 
society;  by  facilitating  exchange  it  accelerates  and  in- 
creases it. 

In  reality  the  largest  share  of  the  business  of  the 
world  is  done  on  a  credit  basis.  In  many  instances  the 
instruments  of  payment  which  we  call  cash  are  in  reahty 
only  promises  to  pay. 

During  the  Middle  Ages  credit  transactions  of  great 
importance  and  on  long  time  were  effected  without  leav- 
ing the  slightest  trace  in  writing;  and  even  to  this  day 
the  Russian  producers  and  merchants  who  frequent  the 
great  annual  fair  at  Nijni  Novgorod,  contract  credit 
obligations  for  twelve  months'  time,  without  giving  the 
least  evidence  of  the  debt,  and  that  for  a  very  good  rea- 
son :  very  frequently  they  can  neither  read  nor  write. 

When  we  give  credit  we  give  value  and  wait  for  the 
value  we  are  to  receive  in  return;  but  we  often  cannot 

185 


186  CREDIT  AND  EXCHANGE. 

afford  to  do  this,  so  we  get  some  other  person  to  wait  for 
us  by  giving  him  an  instrument  of  credit  which  we  take 
when  we  deliver  our  goods.  This  person  to  whom  we 
give  the  instrument  of  credit  may  not  be  able  to  wait 
either,  so  he  takes  the  paper  to  the  bank  and  discounts 
it.  It  is  the  business  of  the  bank  to  wait,  not  the  busi- 
ness of  the  merchant.  The  latter  should  keep  his  full 
capital  active  every  day  and  every  dollar  he  is  waiting 
for  is  inactive  and  is  earning  nothing. 

On  the  other  hand  the  bank  increases  its  capital  by 
waiting,  for  the  simple  reason  that  it  charges  for  wait- 
ing just  as  a  lawyer  charges  for  giving  his  time  to  his 
client. 

But  does  this  increased  circulation  increase  capital? 
The  machine  runs  faster  and  turns  out  more  work,  but 
doesn't  increase  its  size  or  its  intrinsic  value;  it  is  the 
work  that  counts,  not  the  machine. 

History  of  Financial  Exchange. 

In  early  times  foreign  trade  consisted  in  the  direct 
exchange  of  commodities.  A  caravan  set  out  with  a 
variety  of  manufactured  articles,  across  the  deserts  of 
Arabia  or  Sahara,  and  came  back  with  the  ivory,  spices, 
and  other  valuable  raw  products  obtained  by  barter.  In 
later  times  the  merchant  loaded  his  own  ship  and  sent 
her  forth  on  an  adventure,  trusting  that  his  shipmaster 
would  sell  the  cargo  to  advantage,  and,  with  the  pro- 
ceeds, bring  back  another  cargo  to  be  sold  to  great  profit 
at  home.  Trade  was  thus  reciprocal,  and  what  was  sent 
out  paid  for  what  was  brought  back. 

Wherever  this  direct  reciprocal  exchange  did  not 
exist  it  was  necessary  to  devise  some  mode  of  trans- 


CREDIT  AND  EXCHANGE.  187 

ferring  debts.  To  the  early  Italian  and  Jewish  mer- 
chants we  owe  the  development  of  the  use  of  the  credit 
instruments  which  have  since  developed  into  bills  of  ex- 
change. As  early  as  the  fourteenth  century  bills  were 
used  under  similar  customs  and  of  about  the  same  form 
as  those  of  the  present  day. 

Principles  of  Exchange. 

In  commerce  the  term  exchange  is  generally  used  to 
designate  that  species  of  mercantile  transactions  by 
which  the  debts  of  individuals  residing  at  a  distance  from 
their  creditors  are  canceled  without  the  transmission  of 
money.  Among  cities  or  countries  having  any  consider- 
able intercourse  together,  the  debts  mutually  due  by 
each  other  approach,  for  the  most  part,  near  to  an  equal- 
ity. 

There  are  at  all  times,  for  example,  a  number  of  per- 
sons in  New  York  indebted  to  London,  and  perhaps,  as 
many  persons  in  London  indebted  to  New  York.  Hence 
when  A  of  New  York  wishes  to  make  a  paj^ment  to  B 
of  London,  he  does  not  send  the  actual  money,  but  he 
goes  into  the  market  and  buys  a  hill  of  exchange  on 
London;  that  is,  he  goes  to  a  New  York  bank,  doing  a 
foreign  business,  such  as  Brown  Bros,  or  J.  Pierpont 
Morgan  &  Co.  and  buys  a  draft,  called  a  bill  of  ex- 
change, which  is  in  reality  the  New  York  banker's  order 
on  his  London  correspondent,  asking  the  latter  to  pay  the 
money  to  the  person  named. 

It  may  be  that  about  the  same  time  some  London  mer- 
chant who  owes  money  in  New  York  goes  to  the  very 
same  London  banker  and  buys  a  draft  on  the  New  York 
bank.    In  this  way  the  one  draft  cancels  the  other,  and 


188  CREDIT  AND  EXCHANGE. 

when  there  is  a  difference  at  the  end  of  a  week  or  month 
the  actual  gold  is  sent  across  to  balance  the  account. 

Inland  or  domestic  bills  are  commonly  called  drafts. 
Foreign  bills,  that  is  bills  on  foreign  countries,  are  called 
exchange. 

The  par  of  the  currency  of  any  two  countries  means, 
among  merchants,  the  equivalency  of  a  certain  amount 
of  the  currency  of  the  one  in  the  currency  of  the  other, 
supposing  the  currencies  of  both  to  be  of  the  precise 
weight  and  purity  fixed  by  their  respective  mints.  Thus, 
according  to  the  mint  regulations  of  Great  Britain  and 
France,  <£l  sterling  is  equal  to  25.2  francs,  which  is  said 
to  be  the  par  between  London  and  Paris.  And  the  ex- 
change between  the  two  countries  is  said  to  be  at  par 
when  bills  are  bought  and  sold  at  this  rate;  that,  is  for 
example,  when  a  bill  for  £100  drawn  in  London  is 
worth  2520  francs  in  Paris,  and  conversely.  When  £l 
in  London  buys  more  than  25.2  fr.,  exchange  is  said  to  be 
in  favor  of  London. 

The  par  of  exchange  between  Great  Britain  and  the 
United  States  is  4.86  2-3,  that  is,  £l  sterling  is  worth 
$4.86  2-3. 

Exchange  is  quoted  daily  in  New  York  and  other  city 
papers  at  4.87,  or  4.87%,  etc.,  for  sight  bills  and  at  a 
slightly  lower  rate  for  sixty-day  bills.  These  are  the  two 
common  kinds  of  bills  usually  bought.  The  sixty-day  bills 
bought  in  New  York  are  as  good  as  cash  when  they 
reach  London,  but  they  are  cashed  at  a  discount  from 
their  face  value,  unless  they  are  held  until  the  date  of  ma- 
turity. 

The  foregoing  statements  explain  in  a  general  way  the 
meaning  of  the  par  of  exchange,  but  its  exact  determina- 


CKEDIT  AND  EXCHANGE.  189 

tion,  or  the  ascertaining  of  the  precise  equivalency  of  a 
certain  amount  of  the  currency  of  one  country  in  the  cur- 
rency of  another,  is  exceedingly  difficult.  If  the  stand- 
ard of  one  be  gold  and  that  of  another  silver,  the  par 
must  necessarily  vary  with  every  variation  in  the  relative 
values  of  these  metals.  The  value  of  the  precious  metals 
even  in  contiguous  countries,  is  always  exposed  to  fluctu- 
ations from  the  over-issue  or  withdrawal  of  paper,  from 
circumstances  affecting  the  balance  of  payments.  Gold 
is  usually  high  when  there  is  a  demand  for  gold  or  a  scar- 
city of  it,  just  as  it  is  in  the  case  of  potatoes  or  wheat. 
It  is  obvious,  therefore,  that  it  is  all  but  impossible  to 
say,  by  merely  looking  at  the  mint  regulations  of  any 
two  or  more  countries,  and  the  prices  of  bullion  in  each, 
what  is  the  par  of  exchange  between  them. 

The  imports  and  exports  of  bulhon  are  the  real  test 
of  exchange.  If  bullion  is  stationary,  neither  flowing 
into  nor  out  of  a  country,  its  exchanges  may  be  truly 
said  to  be  at  par ;  and,  on  the  other  hand,  if  the  bullion  is 
being  exported  from  a  country,  it  is  proof  that  the  ex^ 
change  is  against  it,  and  conversely  if  there  be  large  im- 
portations. 

Variations  in  the  actual  course  of  exchange,  or  in  the 
price  of  bills,  arising  from  circumstances  affecting  the 
currency  of  two  countries  trading  together,  are  nominal 
only:  such  as  are  real  grow  out  of  circumstances  affecting 
their  trade.  When  each  buys  of  the  other  commodities 
of  precisely  the  same  value,  their  debits  and  credits  will 
be  equal,  and  the  real  exchange  will  be  at  par.  This  con- 
dition of  affairs  very  rarely  happens. 

The  cost  of  conveying  bullion  from  one  country  to  an- 
other forms  the  limit  within  which  the  rise  and  fall  of  the 


190  CREDIT  AND  EXCHANGE. 

real  exchange  between  them  must  be  confined.  If  a 
"New  York  merchant  owes  a  debt  in  London  and  ex- 
change costs  him,  say  2  per  cent,  and  the  cost  of  shipping 
the  gold  is  only  1  per  cent,  it  will  be  to  his  advantage  to 
pay  the  debt  by  sending  the  actual  coin  across,  so  that  the 
limit  within  which  trade  fluctuations  may  range  corres- 
ponds to  the  actual  cost  of  making  remittances  in  cash. 

Fluctuations  in  the  nominal  exchange,  that  is,  in  the 
value  of  currencies  of  countries  trading  together,  have 
no  real  effect  on  foreign  trade.  When  the  currency  is 
depreciated,  the  premium  which  the  exporter  of  com- 
modities derives  from  the  sale  of  the  bill  drawn  on  his 
correspondent  abroad  is  only  equivalent  to  the  increase 
in  the  price  of  the  goods  exported,  occasioned  by  this  de- 
preciation. 

A  favorable  real  exchange  operates  as  a  duty  on  ex- 
portation, and  as  a  bounty  on  importation.  It  is  to  the 
interest  of  merchants  or  bankers  who  deal  in  foreign  bills 
to  buy  them  where  they  can  get  them  the  cheapest,  and  to 
sell  them  where  they  are  the  dearest.  For  this  reason  it 
might  often  be  an  advantage  for  a  'New  York  merchant 
to  buy  a  bill  on  London  to  pay  a  debt  in  Paris,  or  to  buy 
a  bill  on  Paris  to  pay  a  debt  in  Berlin.  For  instance,  in 
the  trade  between  England  and  Italy  the  bills  drawn  on 
England  amount  almost  invariably  to  a  greater  sum  than 
those  drawn  on  Italy.  The  bill-merchants,  however, 
by  buying  up  the  excess  of  the  Italian  bills  on  Lon- 
don, and  selling  them  in  France  and  other  countries  in- 
debted to  England,  prevent  the  real  exchange  from  ever 
becoming  very  much  depressed. 


^  CREDIT  AND  EXCHANGE.  191 

Changes  in  Exchange  Rates. 
Exchange  is  not  affected  so  much  by  the  balance  of 
trade  as  by  the  balance  of  indebtedness.  Europe  can 
contract  debts  in  America  by  the  purchase  of  stocks, 
bonds,  or  other  securities  as  readily  as  by  the  purchase  of 
wheat,  cotton,  or  oil,  the  rate  of  foreign  exchange  be- 
ing similarly  affected  no  matter  what  is  bought.  Euro- 
pean owners  of  American  securities  when  sending  them 
to  America  obtain  the  right  to  draw  against  the  Ameri- 
can receivers  of  those  securities. 

One  hundred  shares  of  stock  sent  by  a  London  firm 
to  a  New  York  firm  will  make  as  much  exchange  against 
New  York  as  the  same  value  in  wheat  shipped  by  a  New 
York  firm  to  a  Liverpool  account ;  so  that  the  balance  of 
trade,  so  far  as  imports  and  exports  are  concerned,  may 
appear  favorable  and  yet  no  balance  of  indebtedness  ap- 
pear. The  movement  of  merchandise  is  recorded  while 
the  movement  of  securities  is  not  recorded.  The  sum 
total  of  our  securities  in  European  hands  is  unknown,  but 
it  probably  exceeds  our  national  debt. 

The  rate  of  foreign  exchange,  affected  by  trade  move- 
ments and  by  the  movements  of  securities,  is  also  affected 
by  interest  and  dividend  payments  and  by  remittances 
for  freight  on  importations  of  merchandise,  the  owners 
of  vessels  usually  being  foreigners.  Our  large  cities 
send  annually  to  Europe  drafts  for  hundreds  of  thou- 
sands of  dollars  to  cover  interest  on  city  bonds. 

Foreign  exchange  is  affected  too,  by  the  difference 
which  exists  at  any  time  between  the  American  and  Euro- 
pean market  rate  of  interest.     If  money  can  be  loaned 


192  CBJEDIT  AND  EXCHANGE. 

at  10  per  cent  in  New  York  while  only  3  per  cent  can  be 
obtained  in  London,  there  is  an  advantage  in  keeping  or 
sending  money  there,  the  difference  in  interest  being 
greater  than  the  cost  of  transportation.  The  fact  of  the 
United  States  being  a  gold  producing  country  is  also  im- 
portant, for  it  indicates  that  a  small  annual  export  of 
gold  is  to  be  expected. 

There  is  another  factor  which  has  a  noticeable  effect, 
namely  that  of  travel.  Thousands  of  wealthy  Americans 
travel  abroad  every  summer  and  the  letters  of  credit 
which  they  carry,  if  not  counterbalanced  by  some  other 
cause,  require  gold  shipments  to  meet  them.  Ordinarily 
when  the  market  rate  of  demand  exceeds  4.867  it  is  evi- 
dent that  foreign  goods  have  \  been  imported  too 
freely,  or  American  goods  are  not  wanted  abroad,  or 
American  securities  find  a  better  market  here  than  in 
Europe,  or  rates  of  interest  here  are  too  low  to  attract  or 
keep  foreign  money,  or  foreigners  are  short  of  money, 
or  there  are  a  great  number  of  Americans  abroad,  or  we 
have  produced  a  surplus  of  gold,  or  freight  remittances 
are  large,  or  interest  payments  on  securities  owned 
abroad  are  heavy.  And  when  the  market  rate  is  below 
4.867,  the  reverse  is  true. 

Of  course  there  are  other  causes,  and  important  ones 
too,  but  those  named  are  the  principal  causes  of  changes 
in  rates  under  normal  trade  conditions.  Eastern  capital 
is  extensively  used  in  the  West,  because  the  people  of  the 
West  can  make  a  profit  by  its  use  in  excess  of  the  interest 
and  dividends  sent  to  its  owners.  For  the  very  same  rea- 
son, European  capital  is  extensively  used  in  the  United 
States. 


CBEDIT  AND  EXCHANGE.  193 

Exchange  TermB. 
There  are  several  terms  used  in  connection  with  ex- 
change which  should  be  understood.  Bankers'  bills  of 
exchange  are  bills  drawn  by  bankers  on  bankers.  Com- 
mercial bills  are  those  based  upon  movements  of  mer- 
chandise, and  drawn  by  merchants.  Documentary  bills 
are  those  which  are  accompanied  by  bills  of  lading. 
Normal  exchange  rates  are  those  quoted  in  newspapers; 
there  are  lower  or  inside  rates  which  are  made  to  brokers, 
through  whom  most  of  the  buying  and  selling  is  done. 

Domestic  Exchange. 

The  principle  of  domestic  or  local  exchange  is  pre- 
cisely the  same  as  that  described  as  underlying  the  for- 
eign exchange  business.  In  foreign  exchange  we  have 
to  do  with  a  mixture  of  dollars  with  sovereigns  or  other 
foreign  money.  In  domestic  exchange  we  have  dollars 
at  both  ends  of  the  line. 

Suppose  A  of  New  York  owes  B  of  Chicago  $12,000. 
He  buys  a  draft  (check)  on  Chicago  for  this  sum  and 
mails  it  to  B.  Now  this  draft  will  cost  him  something 
in  addition  to  its  face,  but  it  should  not  cost  more  than 
$12  exchange,  for  the  reason  that  A  can  take  his  $12,000 
in  bills  or  gold  and  express  it  to  Chicago  for  $12.  If 
$12  were  charged  the  rate  of  exchange  would  be  1/10  of 
one  per  cent. 

But  suppose  that  at  the  same  time  C  of  Chicago  has 
$8,000  to  send  to  D  of  New  York  and  is  trying  to  buy 
a  draft  in  Chicago.  If  C  keeps  his  money  or  turns  it 
over  to  B,  or  to  B's  bank,  or  for  that  matter  to  any  bank, 
A  need  not  ship  more  than  $4,000,  for  the  balance  can 
be  turned  over  to  D  in  New  York,  or  to  D's  bank,  or  to 

I.B.L.  Vol.  4—13 


194  CREDIT  AND  EXCHANGE. 

any  bank.  Now  $4,000  can  be  shipped  for  $4,  so  that  the 
rate  of  exchange  on  a  draft  for  $12,000,  only  $4,000  of 
which  need  be  shipped,  should  not  be  more  than  one- 
thirtieth  of  one  per  cent. 

Under  normal  conditions  exchange  should  be  based 
upon  the  cost  of  shipping  the  balances  due  rather  than 
the  gross  amounts  due.  If  Chicago  is  buying  more 
through  New  York  than  New  York  is  buying  through 
Chicago,  it  will  be  necessary  at  regular  intervals  to  ship 
gold  or  bills  from  Chicago  to  New  York  to  meet  the  dif- 
ferences, and  when  this  is  the  trade  condition,  drafts  on 
New  York  if  purchased  in  Chicago  will  be  at  a  premium. 
Drafts  bought  in  New  York  on  Chicago  should  be  at  a 
discount,  but  as  a  matter  of  fact,  they  will  be  at  par. 

There  are,  of  course,  many  other  things  which  affect 
exchanges.  Our  banking  system  is  such  that  the  condi- 
tion of  the  money  market  is  uniform  in  each  banking  cen- 
ter, but  these  centers  may  differ  very  largely  from  each 
other,  and  while  in  Boston  the  banks  might  have  more 
money  than  they  could  use,  the  banks  of  St.  Louis  or  St. 
Paul  might  be  unable  to  meet  the  demand  upon  them. 

The  Cost  of  Shipping  Gold. 

There  are  times  when  it  is  to  the  advantage  of  the 
banker  or  merchant  to  ship  gold  to  meet  foreign  debts. 
Usually  if  sight  bills  on  England  cost  more  than  4.90  it  is 
cheaper  to  ship  gold.  The  following  figures  give  some 
particulars  of  the  cost  of  such  shipments:  Freight — % 
of  one  per  cent.  Insurance — %  of  one  per  ceilt.  Ahra- 
sion — From  nothing  to  %  of  one  per  cent  on  $20-pieces ; 
%  per  cent  to  %  P^r  cent  on  $10-pieces,  and  %  P^^  cent, 
to  1/^  per  cent  on  $5-pieces. 


CREDIT  AND  EXCHANGE.  195 

The  cost  of  bringing  gold  from  London  to  New  York 
is  the  same  as  the  cost  from  New  York  to  London.  The 
actual  demand  for  gold  in  either  city  will  affect  its  value 
slightly,  and  this  temporary  value  must  be  ascertained 
before  making  close  figures  on  a  large  transaction. 

The  World's  Financial  Center. 
There  is  no  doubt  of  the  fact  that  London  is  the  finan- 
cial center  of  the  world.  This  tendency  to  the  centraliza- 
tion of  financial  business  in  London  is  much  promoted 
by  the  fact  that  the  largest  mass  of  cheap  loanable  capi- 
tal exists  there.  The  general  rate  of  interest  in  New 
York  is  at  least  3  per  cent  higher  than  in  London,  so  that 
a  trader  who  has  credit  enough  to  obtain  loans  in  London 
will  make  a  profit  by  borrowing  there  rather  than  in  New 
York  city.  The  great  banks  of  the  world  each  of  which 
is  a  center  for  its  own  section  of  country  must  have  a  gen- 
eral center  for  clearings  and  London  has  grown  to  be 
this  center.  The  great  foreign  trade  of  England,  her 
thousands  of  carrying  ships,  her  merchants  and  invest- 
ments in  every  country  on  the  globe,  the  age  and 
strength  of  her  great  financial  institutions,  and  the  many 
distant  colonies  and  dependencies  which  naturally  have 
financial  relations  with  the  capital  of  the  empire,  tend  to 
give  London  the  unique  position  which  is  rightfully  hers. 
Lombard  and  Threadneedle  streets  are  the  great  money 
streets  of  London,  as  Wall  street  is  of  New  York. 

The  World's  Currencies. , 
In  addition  to  the  gold  and  silver  coins,  the  United 
States  has  in  circulation  about  $350,000,000  in  "green- 
backs"— the  remnant  of  the  forced  paper  currency  of  the 
civil  war ;  about  $155,000,000  in  Treasury  notes  issued  in 


196  CBEDIT  AND  EXCHANGE. 

payment  for  silver  bullion ;  gold  certificates  in  denomina- 
tions of  not  less  than  $10,  issued  upon  deposits  of  gold; 
silver  certificates  issued  against  standard  silver  dollars 
deposited  in  the  Treasury ;  currency  certificates  issued  in 
denominations  of  not  less  than  $5,000  upon  the  deposit 
with  the  Treasury,  by  national  banks,  of  United  States 
legal  tender  notes ;  national  bank  notes  of  denominations 
of  $5  and  upward,  issued  by  banks  upon  the  deposit  with 
the  Treasury  of  United  States  bonds  which  are  held  as 
security  for  the  ultimate  redemption  of  the  notes. 

The  currency  of  Great  Britain  in  actual  circulation  in- 
cludes the  gold  sovereign  (value  $4.8665)  and  half-sov- 
ereign; the  silver  crown  (value  $1.087) ,  half-crown,  shil- 
ling (value  $0,217),  sixpence,  four-pence,  and  three- 
pence. The  paper  money  includes  the  notes  of  the  Bank 
of  England,  the  smallest  denomination  of  which  is  £5, 
the  notes  of  the  Scotch  and  Irish  banks,  the  smallest  de- 
nomination of  which  is  £l,  and  the  notes  of  the  joint- 
stock  and  private  banks. 

The  currency  of  Canada  is  in  form,  at  least,  similar  to 
that  of  the  United  States.  Canada  has  no  gold  coinage 
of  her  own,  but  is  considering  (1910)  the  establishment 
of  a  gold  coinage  of  $5  pieces  on  the  same  standard  as 
the  American  coinage.  The  gold  coins  of  the  United 
States  and  Great  Britain  pass  current  and  are  legal  ten- 
der. The  silver  coins  are  similar  to  those  of  the  United 
States,  except  that  there  is  no  silver  dollar,  and  a  silver 
five-cent  piece.  The  notes  issued  under  the  authority  of 
the  Dominion  are  of  the  denominations  $1,  2  and  $4,  and 
are  redeemable  on  demand  in  gold.  Bank  notes  are  is- 
sued by  the  chartered  banks  in  denominations  not  smaller 


CREDIT  AND  EXCHANGE.  197 

than  $5.  No  special  security  in  the  way  of  deposit  of 
bonds  is  required,  but  the  notes  in  case  of  insolvency  are 
a  preferred  claim  against  all  the  assets  of  the  bank,  in- 
cluding the  double  liability  of  the  stockholders.  The  ag- 
gregate issue  rarely  exceeds  sixty  per  cent  of  the  paid-up 
capital  of  the  bank  and  must  not  exceed  one  hundred  per 
cent. 

The  monetary  system  of  Australia  is  the  same  as  that 
of  Great  Britain. 

British  India  has  a  silver  standard  unit,  the  rupee 
(value  $0,444).  There  are  gold  coins  in  value  equal  to 
five,  ten,  fifteen  and  twenty  rupees  respectively.  The 
government  issues  notes  ranging  in  value  from  five  to 
ten  thousand  rupees  secured  by  deposits  of  gold  and  sil- 
ver. The  money  in  circulation  in  India  exceeds  one  bil- 
lion dollars. 

Germany  has  a  gold  standard  with  the  mark  (value 
$0,208)  as  the  monetary  unit.  The  smallest  gold  coin  is 
the  5-mark  piece.  The  silver  coins  are  the  5-mark,  2- 
mark,  1-mark,  %-mark,  and  1/5-mark  pieces.  The  paper 
money  includes  the  imperial  treasury  notes  payable  in 
gold,  and  the  bank  notes  of  the  Reichsbank,  an  institu- 
tion with  individual  shareholders,  but  largely  under  the 
control  of  the  government.  The  issue  of  notes  of  less 
denomination  than  100  marks  is  prohibited. 

The  government  of  Austria-Hungary  has  recently 
estabhshed  a  monetary  system  with  the  gold  crown 
(value  $0,203)  as  the  unit.  The  gold  coins  consist  of  a 
10-crown  and  a  20-crown  piece,  and  the  silver  coins  of  a 
crown  and  a  half-crown  piece.  As  a  matter  of  fact  there 
is  very  little  metalhc  money  in  circulation.    The  money 


198  CREDIT  AND  EXCHANGE. 

most  in  use  consists  of  an  irredeemable  paper  currency 
issued  by  the  Austro-Hungarian  Bank  in  denominations 
of  10,  100,  and  1,000  florins  (two-crowns),  and  by  the 
treasury  in  smaller  denominations. 

The  Latin  Union,  which  includes  France,  Belgium, 
Italy,  Switzerland,  and  Greece,  has  now  a  single  gold 
standard  with  the  franc  (value  $0.1929)  as  the  monetary 
unit.  The  smallest  gold  coin  is  the  5-f ranc  piece ;  "the 
silver  coins  are  the  franc,  the  2-franc,  the  half- franc  and 
the  20-centimes  (one-fifth  of  a  franc) .  The  coins  of  one 
country  are  received  at  par  in  the  others.  France  issues 
bank  notes  through  the  bank  of  France.  Belgium  issues 
bank  notes  through  the  bank  of  Belgium,  payable  to  the 
bearer  at  sight,  and  the  individuals  and  associations  are 
free  to  issue  bank  notes  on  their  own  responsibihty.  Italy 
has  no  state  bank,  but  there  are  in  the  country  six  banks 
which  are  authorized  to  issue  notes  payable  on  demand. 
The  smallest  denomination  is  50-lire.  Switzerland  has 
now  a  state  bank  with  central  offices  at  Berne  and 
branches  throughout  the  country.  Greece  has  three 
banks  authorized  to  issue  notes  on  such  a  very  low  gold 
and  silver  reserve  that  for  many  years  gold  has  been  at 
a  premium. 

Spain  has  the  silver  peseta,  equivalent  to  the  franc,  as 
a  monetary  unit.  It  has  the  same  gold  and  silver  coins 
as  the  other  countries  of  the  Latin  Union.  The  only 
bank  of  issue  in  the  country  is  the  bank  of  Spain,  a  pri- 
vate institution,  with  certain  government  restrictions.  Its 
smallest  note  of  issue  has  the  value  of  25-pesetas. 

The  Scandinavian  Monetary  Union  embraces  Sweden, 
Norway  and  Denmark.    The  krone  or  crown  (value  $0.- 


CREDIT  AND  EXCHANGE.  199 

268)  is  the  monetary  unit.  The  gold  coins  are  10-kronen 
and  20-kronen,  and  the  silver  coins  are  the  2-kronen,  the 
krone,  and  the  fractional  currency.  Sweden  has  a  bank 
of  issue  entirely  under  the  control  of  the  state.  Joint- 
stock  banks  are  also  permitted  to  issue  notes  under  re- 
strictions favorable  to  the  monetary  system.  Norway 
has  one  bank  of  issue — a  joint-stock  bank  with  the  state 
as  principal  shareholder.  Denmark  issues  notes  through 
a  state  bank. 

The  monetary  unit  of  The  Netherlands  is  the  guilder 
or  florin  (value  $0,402)  of  100  cents.  The  gold  coins  are 
the  10-florin  and  5-florin  pieces.  The  bank  of  the 
Netherlands,  situated  in  Amsterdam,  has  the  exclusive 
right  to  issue  notes. 

The  monetary  unit  of  Russia  is  the  gold  ruble  (value 
$0.52)  of  100  kopecks.  Other  gold  coins  are  the  imperial 
equal  to  10  rubles  and  the  half -imperial.  The  National 
Bank  of  Russia  is  the  only  bank  of  issue  in  the  empire. 
This  bank  issues  paper  money  denominations  of  1,  3,  5, 
10,  25,  and  100  rubles. 

The  gold  milreis  (value  $1.08)  is  the  monetary  unit  of 
Portugal. 

The  only  bank  of  issue  in  Turkey  is  the  Imperial  Otto- 
man the  notes  of  which  are  payable  exclusively  in  gold. 

The  currency  of  China  is  made  from  an  alloy  of  cop- 
per, iron,  and  tin.  In  all  large  transactions,  silver  by 
weight  is  the  medium  of  exchange,  the  Mexican  doUar 
being  used  in  the  South  and  ingots  called  shoes,  in  the 
North.  There  are  large  numbers  of  private  banks  which 
issue  notes  upon  their  own  authority  for  local  circulation. 

The  legal  money  of  Japan  is  the  yen  of  100  sen.  The 
yen  is  almost  equal  in  value  to  our  silver  dollar.    Trade 


200  CREDIT  AND  EXCHANGE. 

among  Japanese  is  carried  on  to  a  large  extent  by  paper 
money  issued  under  the  authority  of  the  government. 

Meocico  had  a  silver  standard  until  1905,  when  it  adopt- 
ed the  gold  standard.  The  Mexican  dollar  (el  peso)  is 
the  unit,  and  under  the  name  of  piaster,  is  the  current 
coin  of  several  countries  in  America,  Asia,  and  Africa. 
Thel-e  are  also  gold  coins  in  circulation,  the  smallest  (1 
peso)  being  almost  equal  in  value  to  our  gold  dollar. 

The  Central  American  States  have  bank  notes,  but  the 
metallic  currency  of  these  repubhcs  is  largely  JNIexican. 

Chile  is  on  a  silver  basis,  so  far  as  specie  is  concerned. 
The  real  medium  of  exchange  is  a  depreciated  paper  cur- 
rency. The  unit  i^  the  peso  equal  to  the  5-franc  piece  of 
France. 

The  unit  of  the  Argentine  Republic  is  the  same,  but 
of  gold.  The  actual  currency  is  depreciated  paper  fluc- 
tuating greatly  in  value. 

English  Money. 

Any  person  may  take  bar  gold  to  the  extent  of  £20,- 
000  to  the  English  mint  and  have  it  returned  to  him  in 
sovereigns  and  half-sovereigns.  The  Bank  of  England 
receives  bar  gold  at  £S  17s.  9d.  per  ounce  and  pays  in 
gold  coin.  The  English  sovereign  weighs  123.274 
grains,  and  is  a  legal  tender  so  long  as  it  does  not  weigh 
less  than  122.5. 

English  silver  and  bronze  coins  are  fiat  money,  that  is, 
their  intrinsic  value  is  materially  less  than  their  face 
value.  The  difference  between  the  token  value  and  the 
real  or  intrinsic  value  is  called  seigniorage  and  this  is  a 
large  source  of  revenue. 

English  gold  coins  are  a  legal  tender  for  any  amount; 
silver  coins  are  a  legal  tender  for  only  forty  shillings  or 


CREDIT  AND  EXCHANGE.  201 

less,  and  bronze  coins  for  one  shilling  or  less.  The  gold 
is  largely  handled  by  bulhon  brokers. 

The  Bank  of  England  notes  are  very  ordinary  looking 
pieces  of  white  paper  with  plain  black  printing,  some- 
what larger  in  size  than  those  of  the  United  States.  The 
paper  is  especially  made,  is  very  strong,  and  is  not  easily 
burned.  No  note  is  paid  out  a  second  time.  Every 
check  or  draft  is  paid  in  new  bills. 

In  sending  bank  notes  by  mail  the  Englishman  gener- 
ally cuts  them  in  halves,  takes  a  careful  record  of  their 
marks  and  numbers,  and  sends  one  of  the  halves  by 
registered  mail,  and  the  other  by  ordinary  post. 

The  Scotch  and  Irish  banks  have  a  paper  issue  of  their 
own,  and  there  are  joint-stock  banks  and  private  banks 
that  issue  bank  notes.  These  bank  notes,  although  they 
pass  current,  are  not  legal  tenders. 

**  Crossed"  Checks. 

The  crossed  check  so  common  in  Britain  is  unknown 
in  the  United  States.  It  is  simply  an  ordinary  check 
that  has  upon  its  face  marks  which  signify  that  it  must 
be  presented  through  some  other  bank  or  banker;  and 
checks  of  this  description  will  not  be  cashed  if  they  reach 
the  bank  upon  which  they  are  drawn  by  any  other  way. 
They  are  absolutely  worthless  for  presentation  in  the 
hands  of  the  wrong  persons. 

The  banks  are  forbidden  by  law  to  cash  such  a  check 
over  the  counter.  The  receiver  of  such  a  check  must 
necessarily  deposit  it.     Our  stamped  words  "Payable 

only  through  the clearing  house  when  properly 

indorsed"  have  nearly  the  same  effect. 

Some  houses  say  on  their  bill-heads  how  checks  are  to 


202 


CREDIT  AND  EXCHANGE. 


be  crossed.  When  the  cheek  is  crossed  simply  by  two 
lines  it  may  reach  the  bank  upon  which  it  is  drawn, 
through  any  bank ;  when  it  is  crossed  with  a  bank's  name, 
it  must  reach  the  bank  upon  which  it  is  drawn  through 
the  banker  whose  name  appears  between  the  crossed  lines. 
When  the  drawer  knows  the  name  of  the  payee's  banker 
he  usually  inserts  it;  otherwise  he  simply  draws  the 
Hues. 


Na  A-o.ai+u- 


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PAY.__..MiwLfirOAiuJ:COKl  ^. 


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% 


XIIBURY 


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A  "Crossed"  Check. 

Enghsh  banks  do  not  certify  checks.  Every  check 
must  bear  a  penny  stamp  no  matter  for  how  small  an 
amount  it  is  drawn. 

The  British  Consols. 

The  British  consols  are  securities  representing  the 
consolidated  debt  of  England ;  the  word  consol  being  an 
abbreviation  of  consolidated.  They  are  quoted  in  the 
financial  columns  of  the  newspapers.  Here  is  an  illustra- 
tration:  "Consols  are  unchanged  at  94%  for  cash  and 
94%  for  November  settlement/*  The  word  settlement 
is  used  as  we  would  use  the  word  account.  On  the  London 
Stock  Exchange  there  are  special  settling  days  for  se- 
curities of  all  sorts,  including  transactions  in  foreign  ex- 
change.    By  "November  settlement"  it  is  understood 


CREDIT  AND  EXCHANGE.  203 

that  the  consols  are  to  be  paid  for  on  the  November  sett- 
ling day. 

Canadian  Money. 

Many  Americans  hesitate  to  accept  Canadian  money, 
usually  for  the  reason  that  they  have  difficulty  in  pass- 
ing it  and  partly  from  ignorance  of  its  security.  The 
Canadian  silver  coins  are  in  reality  of  greater  value  than 
the  corresponding  coins  of  the  United  States,  for  the 
reason  that  they  contain  more  silver. 

The  Canadian  one-dollar-bill,  two-dollar-bill,  and 
four-dollar-bill  are  equal  in  value  to  the  very  best  secur- 
ities offered  in  the  United  States,  for  the  reason  that 
they  are  issued  by  the  Canadian  government  and  are 
covered  by  actual  gold  and  silver  in  the  treasury. 

The  notes  issued  by  the  Canadian  banks  are  almost 
equally  good,  for  the  reason  that  the  banks  are  very 
large  institutions,  and  fully  equal  to  the  largest  banks  in 
the  United  States. 

The  Bank  of  Montreal  is  one  of  the  largest  and 
strongest  financial  institutions  in  the  world.  It  has  about 
150  branches  in  the  large  cities  and  towns  of  the  Do- 
minion. The  Canadian  Bank  of  Commerce  and  the  Mer- 
chants' Bank  of  Canada  are  also  institutions  of  splendid 
strength. 

No  bank  is  chartered  that  has  not  a  capital  of  at  least 
$500,000.  There  are  in  all  about  35  banks  with  numerous 
branches.  These  banks  issue  notes  of  denominations  of 
$5  and  upward,  but  the  government  regulations  are  so 
exacting  that  if  a  bank  should  fail  the  holders  of  its 
notes  would  be  almost  sure  to  receive  their  full  value. 
These  banks  always  pay  out  over  the  counter  their  own 
bills. 


204  CREDIT  AND  EXCHANGE. 

Under  the  United  States  system,  which  leaves  each 
bank  so  largely  dependent  upon  the  fortunes  of  its  lo- 
cality, and  the  business  of  each  locality  so  entirely  de- 


Xlmilmxnx.'. 

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cimfjyvu*  Co  tuAM*A....Qt5m^4;4aklti.  ^-}L.  Ikoajvl.  vJunju 

AUMtXu\Ji  *«  oA  kcvi'.  utUu.  6/nAt  IvAuU  JS^    ***^  'umxAjbU  Co  'tvUL 

c^al^  U*.  <u<.|c  *x^«v.  Mess-  Smith  Bros.  %?  Co. 

I.ONDON  :  taekd^nry^uAXUnx-Uuin^JUA^ltAr  (Ao  |2^(>0^  )  tj 
Mu^  l«/Ctiu,  cu«.cL  w«.  tAA.Qa.ciJo  "MioX  liiji  .aa/wot  o^aXt  a^uuX  tJLtu.  'Mxn'UJv 

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tmJEt  ^iImu<.  WLdxmx  <r\A^lluL  beucM.  vl~Hvu  CiAcuJfoA  CtitcA  uidjuiXi.    X4, 

CQ     OyC  OAJt.  AjUfuctJu£&J  ,    ^OuiXiAVUM^ 


tLi  \d  ^J<u^<  «^-iL>  iluti,  1  (A»aa. 


*r>««    SICWATXR 


A  Letter  of  Credit,  First  Page. 

pendent  upon  its  local  banks,  it  is  a  common  thing  to  see 
mutual  ruin  of  banks  and  business  in  numerous  widely 


CREDIT  AND  EXCHANGE.  205 

scattered  localities,  while  the  business  of  the  country  as  a 
whole  is  sound. 

Such  results  are  impossible  in  Canada.  The  widely  ex- 
tended system  of  each  of  the  great  banks,  with  its 
branches  in  every  part  of  the  country,  constitutes  a  sort 
of  financial  insurance,  by  which  each  helps  to  guarantee 
the  soundness  of  all ;  while  the  Canadian  branch  systems, 
interlocking  at  every  town,  leave  it  simply  impossible 
that  any  local  point  of  the  least  importance  should  for  a 
moment  be  lacking  in  the  most  complete  discount,  cur- 
rency, and  other  banking  facilities,  so  long  as  the  whole 
business  of  the  Dominion  is  not  involved  in  common  ruin. 
The  currency  system  is  elastic  and  always  meets  the  de- 
mands. Panics  for  fear  of  stringency  are  unknown.  A 
run  on  a  bank,  as  it  is  understood  in  the  United  States, 
is  practically  impossible. 

Letters  of  Credit. 

The  ordinary  letter  of  credit  is  the  leading  and  usual 
instrument  for  the  use  of  travelers  in  Europe  and  has 
now  become  such  a  common  feature  of  banking  that 
every  one  should  be  familiar  with  its  form  and  purpose. 
We  reproduce  a  facsimile  of  the  first  and  second  pages 
of  a  circular  letter  for  £500.  The  first  is  the  credit 
proper,  authorizing  the  various  correspondents  of  the 
bank  issuing  it,  who  are  named  on  the  third  and  fourth 
pages,  or  any  other  banker  to  whom  the  letter  may  be 
presented,  to  pay  the  holder,  whose  signature  is  given 
on  its  face,  money  to  the  extent  of  £500.  The  second 
page  shows  how  the  holder  availed  himself  of  the  ad- 
vantages of  the  letter.  It  gives  the  names  of  the  banks 
to  which  he  presented  his  letter  and  the  amounts  paid  by 


206 


CREDIT  AND  EXCHANGE. 


each.  With  such  a  letter  a  traveler  could  make  a  trip 
around  the  world  and  not  carry  in  his  pocket  at  any  one 
time  more  gold  or  silver  or  bills  than  would  be  necessary 
to  meet  immediate  local  expenses.  When  a  banker  is- 
sues a  letter  of  credit,  the  party  purchasing  it,  and  who 
is  to  use  it  abroad,  places  his  signature  upon  a  lower 


Bjf   WHOM    PAID 


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Second  Page  of  Letter  of  Credit. 

comer  of  the  document  in  the  banker's  presence.  Other 
copies  of  the  signature  are  left  and  are  forwarded  to  the 
leading  foreign  bankers  drawn  upon.  When  the  party 
buying  the  draft  presents  himself  at  a  London  or  Paris 
bank  with  his  letter  of  credit  and  asks  for  a  payment 
upon  it,  the  banker  asks  him  to  sign  a  draft  on  the  Ameri- 
can banker  issuing  the  letter,  for  the  amount  required, 
which  amount  is  properly  entered  upon  the  letter  of 


CREDIT  AND  EXCHANGE.  207 

credit  before  it  is  returned  to  the  payee.  Payment  is 
usually  made  upon  the  simple  identification  or  compar- 
ison of  signatures. 

If  a  traveler  should  lose  his  letter  of  credit  he  should 
notify  at  once  the  banks  upon  and  by  whom  it  is  drawn. 

These  letters  are  cash  anywhere.  Almost  any  banker 
in  the  world  will  at  any  time  consider  it  to  his  advantage 
to  buy  a  reliable  sterling  draft  on  London.  Such  drafts 
should  sell  at  a  premium  anywhere. 


"At  a  period  in  the  country's  life  when  the  cost  of  living 
Js  only  surpassed  by  actual  waste  and  extravagance,  it  is 
the  banks  throughout  the  country  which  steadfastly  and 
attractively  give  wide  publicity  and  reasons  for  saving.  It 
is  an  example  of  good  business  enterprise;  it  does  not  lessen 
its  educative  value  because  the  banks  profit  through  it." 


CHAPTER  XL 
BANKING  IN  CANADA. 

BY  B.  E.   WALKEE.* 

In  common  with  other  social  developments,  modem 
banking  is  mainly  the  result  of  heredity  and  environ- 
ment, and  not  of  arbitrary  legislation  or  the  general  ad- 
mission in  any  wide  degree  of  settled  principles  in  the 
practice  of  banking.  The  student  endeavoring  to  under- 
stand the  science  of  banking,  seeking  to  discover  some 
body  of  principles  underlying  the  practice  of  banking 
throughout  the  world,  is  confused  by  the  radical  differ- 
ences between  the  systems  of  the  various  nations  and 
the  complicated  nature  of  the  conditions  surrounding 
each  of  these  systems.  The  most  cherished  dogma  of 
one  country  is  rank  heresy  in  another.  The  principles 
suitable  to  an  old  country,  with  a  compact  population, 
a  highly  developed  railroad  and  telegraph  organization 
for  the  distribution  of  commodities  and  information,  and 
wealth  enough  to  be  lenders  to  other  nations,  are  not  ap- 
plicable to  a  new  countiy  with  a  scattered  population,  im- 
perfect means  of  distribution,  and  little  wealth  apart 
from  fixed  property — a  country,  indeed,  requiring  to 
borrow  largely  from  older  and  wealthier  communities. 

Again,  if  in  any  country  banking  has  been  left  to  de- 
velop itself  in  accordance  alone  with  the  requirements  of 
trade,  or  nearly  so,  that  country  has  been  fortunate  in 


*Preflid0at  of  tbs  CaBadian  Bank  of  Gexamcree,  ToroBto. 
I.B.L.  Vol.  4—14  209 


210  BANKING  IN  CANADA. 

this  respect  as  compared  with  others,  where  the  national 
debt,  caused  by  war  or  extravagances  in  public  works, 
has  been  made  the  basis  of  the  currency.  Sometimes, 
however,  the  condition  of  the  present  environment  in  two 
countries  may  be  in  many  respects  similar,  and  yet  a 
practice  in  banking  which  has  worked  out  desirable  re- 
sults in  one  of  these  countries  cannot  be  attempted  in 
the  other.  The  body  of  banking  principles  in  the  other 
country  may  be  so  different,  because  of  hereditary  in- 
fluences, as  to  make  it  impossible  by  any  kind  of  evolu- 
tion to  add  the  practice  which  has  proved  so  serviceable 
elsewhere. 

I  am  aware  that  there  is  nothing  new  in  this  point  of 
view,  but  in  attempting  to  speak  on  the  subject  of  bank- 
ing in  Canada,  I  cannot  avoid  comparison  with  this  great 
country  where  banking  systems  are  being  keenly  dis- 
cussed, and  where  it  is  admitted  that  changes,  perhaps  of 
a  radical  nature,  are  necessary.  In  contending  for  the 
comparative  perfection  of  the  Canadian  system,  I  do 
not  wish  to  be  understood  as  asserting  that  the  points 
of  superiority  in  our  system  could  be  adopted  here.  For 
over  half  a  century  banking  in  the  United  States  has 
been  following  lines  of  development  opposed  in  many 
respects  to  the  Canadian  system,  and  it  may  well  be  that 
no  matter  how  desirable,  it  is  too  late  to  adopt  our  prac- 
tices. 

My  main  object,  however,  is  to  describe  the  banking 
of  Canada,  and  to  demonstrate,  if  I  can,  its  suitability  to 
the  requirements  of  trade  in  that  country  and  not  its 
suitability  elsewhere. 


BANKING  IN  CANADA.  211 

Bank  Charters. 
It  has  been  occasionally  urged  by  writers  in  financial 
journals  published  in  the  United  States,  that  banking  in 
Canada  is  a  monopoly,  and,  therefore,  unsuited  to  the 
democratic  principles  of  this  country.  These  writers 
have  overlooked  the  fact  that  the  Province  of  Ontario, 
the  center  of  thought  and  progress  in  the  Dominion,  is 
the  most  democratic  community  in  the  British  Empire, 
and  that  the  legislation  of  Canada,  whether  in  form  or 
not,  is  in  reality  as  liberal  as  it  can  well  be. 

Banking  in  Canada  is  not  in  any  sense  a  monopoly. 
Whether  it  can  be  said  to  be  "free  banking"  as  under- 
stood in  the  United  States,  depends  on  what  is  meant 
by  that  term.  In  the  United  States  a  certain  number  of 
individuals  having  complied  with  certain  requirements — 
more  numerous  and  complicated,  by  the  way,  than  the 
Canadian  requirements — become  thereby  an  incorporated 
bank,  if  we  regard  the  consent  of  the  Comptroller  of  the 
Currency  as  a  matter  of  form.  In  Canada,  merely  in 
order  to  follow  the  British  parliamentary  methods,  when 
a  certain  number  of  individuals  have  complied  with  cer- 
tain requirements,  they  are  supposed  to  have  apphed  for 
a  charter,  which  parliament,  theoretically,  might  refuse, 
but  which,  as  a  matter  of  fact,  would  not  be  refused  un- 
less doubt  existed  as  to  the  bona-fide  character  of  the 
proposed  bank.  Then,  as  in  the  United  States,  on  com- 
plying with  certain  other  requirements  and  obtaining 
consent  of  the  Treasury  Board  (jJerforming  in  this  case 
the  same  function  as  the  Comptroller  of  the  Currency  in 
the  United  States) ,  the  bank  is  ready  for  business. 


212  BANKING  IN  CANADA. 

The  main  difference  in  the  matter  of  obtaining  the 
privilege  from  the  people  to  carry  on  the  business  of 
banking  is  that  in  Canada  the  subscribed  capital  must  be 
$500,000,  paid  up  to  the  extent  of  one-half,  or  $250,000, 
and  this  fact  must  be  proved  by  the  temporary  deposit  of 
the  actual  money  with  the  Treasury  Department.  If 
it  is  contended  that  a  monopolistic  element  is  introduced 
by  making  the  minimum  paid-up  capital  $250,000,  I 
have  only  to  point  to  the  varying  minima  of  capital  in 
the  National  banking  system,  based  upon  the  population 
of  the  city  or  town  where  a  bank  is  established.  The 
minimum  with  us  is  placed  so  high  because  with  the  privi- 
lege to  carry  on  the  business  of  banking  is  attached  the 
privilege  to  open  branches  and  to  issue  a  bank  note  cur- 
rency not  secured  by  special  pledge  with  the  government. 
In  the  opinion  of  many  Canadians  the  minimum  is  too 
small. 

So  much  for  the  statement  that  banking  is  less  "free" 
in  Canada  than  in  the  United  States.  I  think  the  very 
term  "free  banking,"  about  which  so  much  was  written 
in  the  antebellum  days,  is  a  misnomer.  A  little  less  of 
freedom  in  the  ability  to  create  a  bank,  and  a  little  more 
knowledge  on  the  part  of  the  people  regarding  the  true 
function  of  banking,  and  its  high  place  in  the  world  of 
commerce,  would  be  for  the  public  good.  What  we  want 
is  the  most  absolute  evidence,  when  a  bank  is  created,  that 
its  projectors  are  embarking  in  a  bona-fide  venture  and 
have  put  at  risk  a  sum  considerable  enough  to  ensure  that 
fact. 

Liability  of  Shareholders. 

In  Canada,  as  in  the  United  States,  shareholders  in 
banks  are  subject  to  what  is  known  as  "double  hability." 


BANKING  IN  CANADA.  213 

For  the  benefit  of  any  who  may  not  understand  the 
phrase,  I  will  quote  the  section  in  full: 

"In  the  event  of  the  property  and  assets  of  the  bank 
being  insufficient  to  pay  its  debts  and  liabilities,  each 
shareholder  of  the  bank  shall  be  liable  for  the  deficiency 
to  an  amount  equal  to  the  par  value  of  the  shares  held 
by  him,  in  addition  to  any  amount  not  paid  up  on  such 
shares."— (Sec.  89.) 

I  can  remember  when  the  practical  value  of  this  power 
to  call  on  the  shareholders  in  the  event  of  the  failure  of 
a  bank  for  a  second  payment  to  the  extent  of  the  sub- 
scribed amount  of  the  shares,  was  doubted  by  many. 
Shares  were  transferred  just  before  failure  to 'men  un- 
able to  meet  such  calls  and  willing  to  be  used  in  this  man- 
ner, or  shares  were  found  to  be  held  by  men  of  straw  who 
owed  a  corresponding  amount  to  the  bank.  Or,  again, 
many  of  the  shareholders  were  borrowers  for  amounts 
far  in  excess  of  their  holdings  in  shares,  and  the  failure 
of  the  bank  precipitated  their  failure  as  well,  and  they 
were  unable  to  pay.  Of  course  there  were  always  some 
real  investors  among  the  shareholders,  but  the  value  of 
the  double  liability  was  a  very  variable  and  doubtful 
quantity.  These  features  have  not,  as  we  know,  all 
passed  away,  but  we  have  done  as  much  as  we  could  to 
guarantee  an  honest  share  Hst  and  to  prevent  the  share- 
holder from  escaping  his  liability. 

Banks  are  not  allowed  to  lend  money  on  their  own 
or  the  stock  of  any  other  Canadian  bank,  and  as  the  mini- 
mum paid-up  capital  of  $250,000  must  be  deposited  with 
the  Finance  Department  before  a  bank  commences  busi- 
ness, this  should  ensure  a  bona-fide  capital  at  the  start. 


214  BANKING  IN  CANADA. 

All  transfers  of  shares  must  be  accepted  by  the  trans- 
feree. No  transfers  within  60  days  before  failure  avoid 
the  double  liability  of  the  transferror  unless  the  trans- 
feree is  able  to  pay. 

A  list  of  the  shareholders  in  all  banks  is  published  an- 
nually by  the  government,  and  this  book  is  eagerly  ex- 
amined by  investors  to  ascertain  changes  in  the  share  list 
of  banks  which  might  indicate  distrust. 

As  the  capital  of  each  bank  is  large  and  the  number  of 
banks  small  relatively  to  the  United  States,  there  is,  re- 
garding everything  connected  with  the*  credit  of  a  Cana- 
dian bank,  an  amount  of  public  scrutinjf  which  leads  to 
circumspection  in  the  conduct  of  bank  authorities. 
Again,  the  very  fact  that  the  capital  is  large  and  that  the 
banks  have  many  branches  and  a  more  or  less  national 
character,  causes  the  stock  to  be  widely  held.  In  the  lar- 
gest banks  the  share  list  numbers  from  1,800  to  2,000 
names. 

We  still,  doubtless,  have  plenty  of  bad  banking  and 
will  always  have  it.  No  legislative  checks  will  prevent 
that,  and  even  a  severe  public  scrutiny  will  not  alto- 
gether prevent  it ;  but  our  banking  history  since  the  Con- 
federation of  the  old  provinces  into  the  Dominion  in 
1867,  shows  that  the  double  liabihty  has  been  a  most  sub- 
stantial asset,  and  has  done  much  toward*  enabhng 
Hquidated  banks  to  pay  in  full.  In  my  own  province  of 
Ontario  we  have  the  fine  record  of  no  instance,  save  one, 
since  Confederation  in  1867,  in  which  aU  creditors  have 
not  been  paid  in  full. 

In  the  case  of  this  one  blemish  the  dividends  amounted 
to  99  1/3  cents  to  depositors,  only  the  unwarrantably 


BANKING  IN  CANADA.  215 

high  fees  paid  to  the  liquidators  causing  the  dividend  to 
fall  below  100  cents.  In  the  short  life  of  this  institution 
almost  every  sin  in  the  calendar  of  banking  had  been 
committed. 

Term  of  the  Charter. 

Under  the  United  States  national  banking  system  the 
life  of  a  bank  is  limited  to  twenty  years  from  the  date  of 
the  execution  of  the  particular  bank's  certificate  of  or- 
ganization, but  at  the  expiration  of  the  first,  or  any  suc- 
ceeding period,  the  bank,  if  it  elects  to  do  so,  may  have 
its  corporate  existence  renewed  for  the  same  number  of 
years. 

Under  the  Canadian  system  the  charter  of  every  bank 
expires  at  the  same  time,  and  the  renewal  period  is  only 
ten  years. 

I  do  not  intend  to  discuss  the  length  of  the  period — 
most  of  us  think  it  quite  too  short.  It  is  the  effect  of  all 
charters  expiring  at  the  same  time  to  which  I  desire  to 
draw  attention. 

This  condition  of  things  doubtless  arose  merely  from 
the  confederation  in  1867  of  the  provinces  which  had 
granted  the  then  existing  charters,  but  which  thereupon 
surrendered  their  authority  over  banking  institutions  to 
the  Federal  Government.  As  the  charters  granted  by 
the  old  provinces  expired,  the  banks  working  under  them 
became  institutions  subject  to  the  new  Federal  or  Do- 
minion Banking  Act,  and  by  its  conditions  every  charter 
expires  at  the  same  time.  This  insures  a  complete  dis- 
cussion of  the  principles  underlying  the  Act,  and  of  the 
details  connected  with  the  working  of  it,  once  in  ten  years. 


216  BANKING  IN  CANADA. 

In  the  interval  we  are  almost  free  from  attempts  by- 
demagogues  or  ambitious  but  ill-informed  legislators  to 
interfere  with  the  details  of  our  system,  but  during  the 
session  of  Parliament  preceding  the  date  of  the  expiry  of 
the  charters  we  have  to  defend  our  system  from  the  dem- 
agogue, the  bank-hater,  the  honest  but  inexperienced  cit- 
izen who  writes  letters  to  the  press,  sometimes  the  press 
itself — indeed  from  all  the  sources  of  attack  which  insti- 
tutions possessing  a  franchise  granted  by  the  people  ex- 
perience when  they  come  before  the  public  to  answer  for 
their  stewardship.  But  while  resisting  the  attacks  of  ig- 
norance, we  are,  of  course,  cdlled  upon  to  answer  such 
just  criticism  as  may  arise  from  the  existence  of  defects 
in  our  system  developed  by  the  experience  of  time.  Or 
perhaps,  as  when  the  Act  was  under  discussion  in  1890, 
we  may  see  the  defects  even  more  clearly  than  the  public, 
and  may  ourselves  suggest  the  remedies. 

Whatever  may  be  said  for  or  against  these  decennial 
battles,  the  product  of  the  discussion  is  a  Banking  Act, 
improved  in  many  respects  by  the  exchange  of  opinion 
between  the  bankers  and  the  public.  The  banking  sys- 
tem having  been  subjected  to  unsparing  analysis  by  an 
unusually  enlightened  people — perhaps  too  democratic 
in  tendency  and  too  jealous  of  every  privilege  granted, 
but  anxious  to  build  rather  than  to  destroy — is  brought 
at  each  period  of  renewal  to  a  higher  degree  of  perfec- 
tion. 

Banking  Principles. 

What  is  necessary  in  a  banking  system  in  order  that  it 
may  answer  the  requirements  of  a  rapidly  growing 
country  and  yet  be  safe  and  profitable? 


BANKING  IN  CANADA.  217 

1.  It  should  create  a  currency  free  from  doubt  as  to 
value,  readily  convertible  into  specie,  and  answering  in 
volume  to  the  requirements  of  trade.  In  saying  this  I  do 
not  wish  to  be  understood  as  asserting  that  banks  should 
necessarily  enjoy  the  right  to  issue  notes.  Whether  they 
should  or  should  not  issue  notes  must  always,  I  presume, 
end  in  a  discussion  as  to  expediency  in  the  particular 
country  or  banking  system. 

2.  It  should  possess  the  machinery  necessary  to  dis- 
tribute money  over  the  whole  area  of  the  country,  so  that 
the  smallest  possible  inequaHties  in  the  rate  of  interest 
will  result. 

8.  It  should  supply  the  legitimate  wants  of  the  bor- 
rower, not  merely  under  ordinary  circumstances,  but  in 
times  of  financial  stress,  at  least  without  that  curtailment 
which  leads  to  abnormal  rates  of  interest  and  to  failures. 

4.  It  should  afford  the  greatest  possible  measure  of 
safety  to  the  depositor. 

We  think  in  Canada  that  our  system  possesses  all  these 
qualities,  and  we  are  confident  that  we  have  a  currency 
perfectly  suited  to  our  trade  and  other  requirements.  We 
have  not,  however,  arrived  at  our  present  reasonably 
comfortable  condition  by  any  other  process  than  the  usual 
slow  development  from  a  past  full  enough  of  error  and 
bitter  experience. 

Historical  Sketch. 
It  is  perhaps  not  generally  known  that  we  were  among 
the  first  in  modern  times  to  issue  fiat  paper-money  for 
general  circulation.  In  1685,  in  the  time  of  the  French 
regime  in  Canada,  the  Intendant  could  not  pay  his  sol- 
diers.   The  little  struggling  colony,  after  the  manner  of 


218  BANKING  IN  CANADA. 

all  new  countries,  was  an  absorbent  of  money,  and  France 
was  nearly  bankrupt  and  could  afford  no  aid.  So  the  In- 
tendant,  left  to  his  wits  alone  and  having  a  helpless  peo- 
ple to  deal  with,  cut  playing  cards  into  small  pieces,  wrote 
thereon  his  promises  to  pay,  accompanied  by  the  seal  of 
France,  and  thus  led  the  way  in  North  America  in  this 
seductive  method  of  paying  debts. 

For  the  next  thirty  years  this  was  the  money  of  Can- 
ada. Although  always  written,  because  the  people  would 
not  have  accepted  printed  promises  to  pay,  the  volumes 
rose  to  about  $20  per  head,  when  the  usual  results  of  fiat 
money  followed.  It  was  compromised,  and  the  Govern- 
ment promised  never  to  repeat  the  experiment. 

The  poor  colony,  left  with  no  regular  currency,  strug- 
gled for  a  time,  but  in  1729,  at  the  request  of  the  people, 
card  money  was  issued  again.  They  had  now  some  ex- 
perience, but  did  not  understand  how  to  draw  lessons 
from  it,  and  the  amount  issued  was  so  excessive  that  when 
the  British  took  Quebec,  and  assumed  the  Government 
of  Canada,  one  of  the  most  troublesome  features  in  the 
settlement  with  France  was  the  arrangement  for  the  re- 
tirement of  this  currency. 

It  would  have  been  well  if  this  complete  exposition, 
although  on  such  a  small  scale,  of  the  unsoundness  of 
fiat  money,  had  served  for  all  North  America.  Mr. 
Sumner  says  there  was  a  bank  in  Massachusetts  as  early 
as  1686  which  may  have  issued  notes,  but  there  is  a  story 
in  this  connection  so  picturesque  that  I  hope  it  is  true.  A 
couple  of  Massachusetts  fur  traders  are  supposed  to  have 
visited  Canada  a  few  years  after  the  card  money  first  ap- 
peared, and  to  have  reported  at  home  the  prosperity  re- 


BANKING  IN  CANADA.  219 

suiting  from  the  experiment,  and  so  when  the  military 
expedition  against  Canada  was  organized  in  1690,  what 
more  natural  than  that  Massachusetts  should  have  paid 
the  cost  in  the  firsft  of  that  currency  which  in  its  final 
stages  of  collapse  has  given  our  language  that  expressive 
phrase,  "not  worth  a  continental"? 

We  were  even  smaller,  relatively,  in  population  then 
than  we  are  now,  yet  apparently  you  of  the  United  States 
did  not  hesitate  to  adopt  a  very  bad  feature  in  our  de- 
velopment. If  we  have  anything  today  in  our  financial 
conditions  worth  your  attention,  I  hope  it  will  not  the  less 
merit  your  approval  because  the  development  is  on  such 
a  small  scale.  Sound  or  unsound  principles  are  perhaps 
more  easily  detected  when  a  system  has  not  become  com- 
plicated beyond  the  capacity  for  analysis  of  the  ordinary 
individual. 

I  will  now,  in  as  few  words  as  possible,  finish  the  his- 
torical sketch  which  is  necessary  to  the  clear  understand- 
ing of  our  currency  and  banking  as  it  exists  at  present. 
Shortly  after  you  organized  a  bank  in  Philadelphia  in 
1781  and  another  in  New  York  in  1784,  the  merchants  of 
Quebec  and  Montreal  began  to  agitate  for  a  bank  of  is- 
sue. In  those  days  a  bank  without  the  power  to  issue 
notes  was  of  little  use;  but  the  people  of  Canada  having 
very  strong  opinions  on  this  subject,  the  attempt  was  a 
failure,  although  in  1792  a  private  bank  of  deposit  re- 
sulted. The  merchants  tried  again  with  the  same  result 
in  1807-8.  But  during  the  war  of  1812  the  Government 
found  it  necessary  to  issue  some  kind  of  paper  money, 
and  an  Army  Bill  Office  was  created.  These  were  the 
first  paper  notes  put  in  circulation  in  Canada  under  Brit- 


220  BANKING  IN  CANADA. 

ish  authority,  and  as  they  were  paid  in  full,  the  people 
must  have  been  at  last  convinced  that  all  paper  money 
was  not  bad.  In  the  Province  of  Nova  Scotia,  not  then 
joined  with  us  in  the  Dominion  of  Canada  as  it  is  now. 
Treasury  notes  were  also  issued  in  1812.  At  the  same 
time  banking  was  growing  rapidly  in  Great  Britain  and 
the  United  States,  and  in  1817  our  first  joint  stocks  bank 
was  created — that  great  institution  of  which  we  are  all 
so  proud,  and  which  has  done  its  share  in  making  Chicago 
what  it  is  today — the  Bank  of  Montreal. 

From  1817  to  1825,  two  banks  were  established  in 
Lower  Canada  (Quebec),  and  one  each  in  Upper  Can- 
ada (Ontario),  New  Brunswick  and  Nova  Scotia,  all 
now  doing  business  except  one. 

The  Condition  at  Confederation. 

I  will  not  attempt  to  follow  the  course  of  banking  in 
the  old  provinces,  but  it  is  necessary  to  indicate  the  con- 
dition of  banking  and  currency  at  the  time  of  the  Con- 
federation of  the  provinces  into  the  Dominion  of  Canada 
in  1867.  There  were  thirty-nine  charters,  but  only  twen- 
ty-seven banks  doing  business.  The  charters  expired  at 
various  dates  from  1870  to  1892,  and  varied  in  accord- 
ance with  the  views  regarding  banking  in  the  different 
provinces.  In  Upper  and  Lower  Canada  ( Old  Canada) , 
shareholders  were  hable  for  double  the  amount  of  their 
stock,  except  that  there  was  one  bank  en  commandite^  the 
"principal  partners"  having  unlimited  personal  liability. 
In  most  cases  notes  could  be  issued  equal  to  the  paid-up 
capital  plus  specie  and  Government  securities  held.  In 
New  Brunswick  charters  had  been  granted  without  the 


BANKING  IN  CANADA.  221 

double  liability,  but  the  principle  was  being  insisted  on  in 
renewals,  while  in  Nova  Scotia  in  the  opinion  of  some 
there  was  no  double  liabiUty.  In  Old  Canada  ^d  Nova 
Scotia,  as  a  rule,  total  liabilities  were  restricted  to  three 
times,  and  in  New  Brunswick  to  twice  the  amount  of 
capital.  There  was  also  one  bank  with  a  royal  charter, 
head  office  in  England,  and  shareholders  not  under 
double  liability.  The  situation  was  further  complicated 
by  the  "Free  Banking  Act,"  under  which  notes  could  be 
issued  secured  by  deposit  of  Government  debentures,  and 
by  the  legal  tender  issues  of  the  Governments  of  Old 
Canada  and  Nova  Scotia.  In  1866-67  two  of  the  largest 
banks  in  Upper  Canada  failed,  resulting  in  a  very  severe 
financial  crisis. 

Under  these  conditions,  and  after  tentative  legislation 
in  1867  and  1870,  the  first  general  Bank  Act  of  the  Do- 
minion was  passed  in  1871  (34  Vict.,  c.  v.)  It  confirmed 
the  special  features  in  the  bank  working  under  a  royal 
charter,  and  that  with  "principal  partners"  personally 
liable,  and  it  will  be  understood  in  any  statements  here- 
after regarding  banks  as  a  whole  that  these  institutions 
are  not  referred  to.  As  charters  of  other  banks  expired 
they  were  renewed  under  the  Dominion  Act.  The  first 
Act  extended  all  charters  for  ten  years,  which  practice 
has  been  followed  thus  far.  There  were  various  amend- 
ments during  the  first  few  years,  but  since  then  changes 
have  been  infrequent,  except  at  the  regular  revisions  in 
1880  and  1890.  The  Act  hereafter  referred  to  is  that 
assented  to  May,  1890,  and  which  came  into  force  July, 
1891.     (53  Vict,  c.  xxxi.) 


222  BANKING  IN  CANADA. 

Note  Issues. 
V  In  the  successive  Banking  Acts  of  the  Dominion  Par- 
liament banks  have  been  empowered  to  issue  circulating 
notes  to  the  extent  of  the  unimpaired  paid-up  capital. 
By  the  first  Act  the  note-holders  had  no  greater  security 
than  the  depositors  and  other  creditors.  At  the  renewal 
of  charters  in  1880,  the  circulating  note  was  made  a  prior 
lien  upon  all  assets;  and  at  the  renewal  in  1890  the  banks, 
at  their  own  suggestion,  were  in  addition  required  to 
create  in  two  years  a  guarantee  fund  of  5  per  cent,  upon 
their  circulation,  to  be  kept  unimpaired,  the  annual  con- 
tribution, however,  if  the  fund  is  depleted,  to  be  limited 
to  1  per  cent.  The  fund  is  to  be  used  whenever  the  liq- 
uidator of  a  failed  bank  is  unable  to  redeem  note  issues 
in  full  after  a  lapse  of  sixty  days.  Notes  of  insolvent 
banks  are  to  bear  6  per  cent,  interest  from  the  date  of 
suspension,  until  the  liquidator  announces  his  ability  to 
redeem.  Banks  are  also  required  to  make  arrangements 
for  the  redemption  at  par  of  their  notes  in  the  chief  com- 
mercial cities  in  each  of  the  provinces  of  the  Dominion. 

The  change  in  1880  was  caused  by  the  failure  of  a 
small  bank  with  a  circulation  of  about  $125,000,  paying 
all  creditors,  note-holders  included,  only  57%  per  cent. 
The  change  in  the  Act  of  1890  was  due  to  the  demand 
for  a  currency  which  would  pass  over  the  entire  Domin- 
ion without  discount  under  any  circumstances.  The  his- 
tory of  banking  in  Canada  since  Confederation  shows  no 
instance  in  which  a  depletion  of  such  a  guarantee  fund 
would  have  occurred.  Fines  from  $1,000  to  $100,000 
may  be  imposed  for  the  over-issue  of  notes.  The  pledg- 
ing of  notes  as  security  for  a  debt,  or  the  fraudulent  issue 
of  notes  in  any  shape,  renders  all  parties  participating 


BANKING  IN  CANAIJA.  223 

liable  to  fine  and  imprisonment.  As  the  crown  preroga- 
tive to  payment  in  priority  to  other  creditors  had  been  set 
up  on  behalf  of  both  Dominion  and  Provincial  Govern- 
ments, the  Act  places  the  claims  of  the  Dominion  second 
to  the  note  issues,  and  those  of  the  provinces  third.  Notes 
of  a  lesser  denomination  than  $5  may  not  be  issued,  and 
all  notes  must  be  multiples  of  $5.  Notes  smaller  than  $5 
are  issued  by  the  Dominion  Government. 

Distinctive  Features. 
The  distinctive  features,  therefore,  of  our  bank  note 
issues  are : — 

(a)  They  are  not  secured  by  the  pledge  or  special  de- 
posit with  the  Government  of  bonds  or  other  securities, 
but  are  simply  credit  instruments  based  upon  the  general 
assets  of  the  banks  issuing  them. 

(b)  But  in  order  that  they  may  not  be  less  secure 
than  notes  issued  against  bonds  deposited  with  the  Gov- 
ernment, they  are  made  a  first  charge  upon  the  assets. 

(c)  To  avoid  discount  for  geographical  reasons  each 
bank  is  obliged  to  arrange  for  the  redemption  of  its  notes 
in  the  commercial  centres  throughout  the  Dominion. 

(d)  And,  finally,  to  avoid  discount  at  the  moment  of 
the  suspension  of  a  bank,  either  because  of  delay  in  pay- 
ment of  note  issues  by  the  liquidator  or  of  doubt  as  to  ul- 
timate payment,  each  bank  is  obliged  to  keep  in  the  hands 
of  the  Government  a  deposit  equal  to  five  per  cent,  on  its 
average  circulation,  the  average  being  taken  from  the 
maximum  circulation  of  each  bank  in  each  month  of  the 
year.  This  is  called  the  Bank  Circulation  Redemption 
Fund,  and  should  any  liquidator  fail  to  redeem  the  note 


224  BANKING  IN  CANADA. 

of  a  failed  bank,  recourse  may  be  had  to  the  entire  fund 
if  necessary.  As  a  matter  of  fact,  liquidators  almost  in- 
variably are  able  to  redeem  the  note  issues  as  they  are 
presented,  but  in  order  that  all  solvent  banks  may  accept 
without  loss  the  notes  of  an  insolvent  bank,  these  notes 
bear  six  per  cent,  interest  from  the  date  of  suspension  to 
the  date  of  the  liquidator's  announcement  that  he  is 
ready  to  redeem. 

The  Basis  of  Elasticity. 

I  have  already  stated,  in  attempting  to  outline  what  is 
necessary  in  a  banking  system  in  order  that  it  may  answer 
the  requirements  of  a  rapidly  growing  country,  that  "it 
should  create  a  currency  free  from  doubt  as  to  value, 
readily  convertible  into  specie,  and  answering  in  volume 
to  the  requirements  of  trade."  In  an  admirable  paper  on 
"The  Note  Circulation,"  read  in  December,  1889,  before 
the  Institute  of  Bankers,  in  London,  England,  by  Mr. 
Inglis  Palgrave,  only  two  requisites  in  a  note  circulation 
are  directly  stated  as  essential:  "First,  that  it  should  be 
completely  secured.  Second,  that  it  should  be  readily 
convertible  into  metalhc  money."  But  the  discussion 
which  follows  bears  directly  upon  a  third  requisite,  that  it 
should  answer  in  volume  to  the  fluctuating  requirements 
of  trade,  in  a  word  that  it  should  be  elastic.  This  last  is  a 
much  less  important  point,  however,  in  England  than  in 
North  America. 

In  discussing  bank  issues  I  will  reverse  the  order  in 
which  the  three  requirements  are  placed  in  Mr.  Pal- 
grave's  paper  and  the  ensuing  discussion,  and  take  up  the 
question  of  elasticity  first.    I  shall  not  attempt  to  discuss 


BANKING  IN  CANADA.  225 

the  many  and  conflicting  views  held  regarding  paper 
money,  its  use  and  abuse,  and  whether  there  is  any  scien- 
tific basis  for  its  issue;  but  I  shall  endeavor  to  show  to 
what  extent  it  seems  possible  for  note  issues  in  North 
America  to  have  a  scientific  basis  with  regard  to  elas- 
ticity. In  Canada,  as  in  the  United  States,  the  resulting 
difference  in  business  transactions,  after  checks  and  all 
other  modern  instruments  of  credit  have  been  used,  is  al- 
most entirely  paid  in  paper  money.  It  is  therefore  of  the 
greatest  importance  that  the  amount  of  this  paper  money 
existing  at  any  one  time,  shall  be  as  nearly  as  possible 
just  sufficient  for  the  purpose.  That  is,  that  there  shall 
be  a  power  to  issue  such  money  when  it  is  required,  and 
also  a  power  which  forces  it  back  for  redemption  when  it 
is  not  required. 

I  may,  therefore,  I  think,  safely  lay  it  down  as  a  prin- 
ciple that :  ( 1 )  There  should  be  as  complete  a  relation  as 
possible  between  the  currency  requirements  of  trade  and 
whatever  are  the  causes  which  bring  about  the  issue  of 
paper  money;  (2)  and,  as  it  is  quite  as  necessary  that  no 
over-issue  should  be  possible,  as  that  the  supply  of  cur- 
rency should  be  adequate,  there  should  be  a  similar  rela- 
tion between  the  requirements  of  trade  and  the  causes 
which  force  notes  hack  for  redemption. 

Now,  certainly,  one  of  the  causes  of  the  issue  of  bank 
notes  is  the  profit  to  be  derived  therefrom,  and  it  is  clear 
that  an  amount  sufficient  for  the  needs  of  trade  will  not 
be  issued  unless  it  is  profitable  to  issue.  Likewise  it  is 
clear  that  it  should  not  be  possible  to  keep  notes  out  for 
the  sake  of  the  profit  if  they  are  not  needed. 

l.B.L.  Vol.  4— IS 


226  BANKING  IN  CANADA. 

Currency  and  Trade  Requirements. 

In  Canada,  bank  notes,  as  we  have  seen,  are  secured 
by  a  first  lien  upon  the  entire  assets  of  the  bank,  includ- 
ing the  double  hability,  the  security  being  general  and 
not  special — not  by  the  deposit  of  Government  bonds,  for 
instance.  Therefore  it  is  clear  that  it  will  always  pay 
Canadian  banks  to  issue  currency  when  trade  demands  it. 
Because  bank  notes  in  Canada  are  issued  against  the  gen- 
eral estate  of  the  bank,  they  are  subject  to  daily  actual 
redemption ;  and  no  bank  dares  to  issue  notes  without  re- 
ference to  its  power  to  redeem,  any  more  than  a  solvent 
merchant  dares  to  give  promissory  notes  without  refer- 
ence to  his  ability  to  pay.  The  presentation  for  actual 
redemption  of  every  note  not  required  for  purposes  of 
trade,  is  assured  by  the  fact  that  every  bank  seeks  by  the 
activity  of  its  own  business  to  keep  out  its  own  notes,  and 
therefore  sends  back  daily  for  redemption  the  notes  of 
all  other  banks. 

This  great  feature  in  our  system  as  compared  with  the 
National  Banking  System,*  is  generally  overlooked,  but 


*  It  may  be  well  to  explain  that  while  the  note  issued  by  a  United 
States  National  Bank  is  nominally  redeemable  at  the  counter  of  the 
bank  issuing  it,  it  is  practically  not  so  redeemed,  nor  does  actual  redemp- 
tion by  the  Bank  take  place,  unless  by  the  accident  of  the  note  being 
paid  in  across  its  counter  along  with  the  issues  of  other  National  Banks. 

If  a  National  Bank  wishes  to  recover  from  the  Government  the 
bonds  deposited  as  security  for  its  notes,  it  is  not  required  to  return  the 
actual  notes  issued,  but  can  withdraw  its  bonds  on  the  deposit  of  the 
necessary  amount  in  any  lawful  money. 

The  National  Bank  currency  is  issued  by  several  thousand  banks,  and 
from  the  time  when  a  note  is  first  put  in  circulation  it  practically  loses 
its  specific  character  and  becomes  a  mere  part  of  the  aggregate  of  such 
currency.  It  is  true  each  bank  keeps  with  the  Government  a  fund 
amounting  to  five  per  cent,  of  its  circulation,  out  of  which  the  Govern- 
ment redeems  any  notes  which  may  be  presented,  but  the  chief  use  of  this 
fund  is  to  rid  the  currency  of  mutilated,  dirty,  or  worn  out  notes. 

Although  not  actually  a  legal  tender,  each  National  Bank  is  required 
to  accept  them  for  all  debts  due,  except  duties  on  imports,  and  may  pay 


BANKING  IN  CANADA.  227 

it  is  because  of  this  daily  actual  redemption  that  we  have 
never  had  any  serious  inflation  of  our  currency,  if  indeed 
there  has  ever  been  any  inflation  at  all.  Trade,  of  course, 
becomes  inflated,  and  the  currency  will  follow  trade,  but 
that  is  a  very  different  thing  from  the  existence  in  a 
country  of  a  great  volume  of  paper  money  not  required 
by  trade. 

I  will  not  discuss  at  length  this  quahty  of  elasticity  in 
our  system,  because  it  is  generally  admitted.  But  some 
critic  may  endeavor  to  show  that  similar  quality  might 
be  given  to  a  currency  secured  by  Government  bonds. 
In  the  older  countries  of  the  world  it  may  be  suflicient 
if  the  volimie  of  currency  rises  and  falls  with  the  general 
course  of  trade  over  a  series  of  years,  and  without  re- 
ference to  the  fluctuations  within  the  twelve  months  of 
the  year.  In  North  America  it  is  not  enough  that  the 
volume  of  currency  should  rise  and  fall  from  year  to 
year. 

In  Canada  we  find  that  between  the  low  average  of 
the  circulation  during  about  eight  months  of  each  year 
and  the  maximum  attained  at  the  busiest  period  of  the 
autumn  and  winter,  there  is  a  difference  of  twenty  per 
cent.,  the  movement  upward  in  the  autumn  and  down- 


them  out  for  all  Government  expenditure*  except  interest  on  the  public 
debt.  What  follows  from  this  is  obvious.  So  long  as  there  is  no  dis- 
trust regarding  the  ability  of  the  United  States  Treasury  to  redeem,  re- 
demption is  not  sought  by  anyone.  It  is  to  be  remembered  that  in  the 
United  States  (as  in  Canada)  gold  practically  does  not  circulate  as 
money.  Apart  from  distrust  no  bank  would  desire  to  encumber  itself 
with  gold  as  compared  with  United  States  notes  or  United  States  Na- 
tional Bank  notes. 

When  gold  is  wanted  for  export  it  is  obtained  at  the  moment  and 
almost  invariably  from  the  one  source — the  Government  Treasury — in 
exchange  for  Treasury  certificates  representing  gold  previously  lodged  or 
tot  United  States  legal  tender  notes. 


228  BANKING  IN  CANADA. 

ward  in  the  spring  being  so  sudden  that  without  the 
power  in  the  banks  to  issue,  in  the  autumn  serious  strin- 
gency must  result,  and  without  the  force  which  brings 
about  redemption  in  the  spring  there  must  be  plethora. 
As  a  matter  of  fact  it  works  automatically,  and  there  is 
always  enough  and  never  too  much. 

Bond-Secured  Currenpy. 

If  our  currency  were  secured  by  Government  bonds 
the  volume  in  existence  at  any  one  time  would  be  deter- 
mined by  the  profit  to  be  gained  by  the  issue  of  such 
bond-secured  currency.  It  would,  therefore,  be  necessary 
to  fix  a  maximum  beyond  which  no  currency  could  be  is- 
sued, but  as  such  an  arbitrary  limit  would  be  mere  legisla- 
tive guess  work,  it  would  be  productive  of  the  evils  inci- 
dent to  all  efforts  to  curb  natural  laws  by  legislation.  As 
we  all  know,  when  the  National  Bank  charters  were  of- 
fered by  the  Federal  Government  to  the  State  Banks,  the 
bonds  of  the  United  States  bore  5  to  6  per  cent,  interest, 
and  the  business  of  issuing  currency  against  such  bonds 
was  so  profitable  that  a  maximum  such  as  I  have  referred 
to  was  fixed,  with  an  elaborate  provision  stating  how  the 
banking  charters  were  to  be  distributed  as  to  area,  in  or- 
der that  each  State  or  section  of  country  might  have  a 
fair  share.  This  was  followed  by  several  adjustments, 
the  last  limit  being  $354,000,000,  no  one  being  satisfied 
with  the  interference  with  free  banking,  and  the  cry  of 
monopoly  being  frequently  heard.  Subsequently  the 
maximum  was  abandoned ;  indeed  the  business  of  issuing 
notes  against  Government  bonds  had  become  unprofit- 
able and  there  was  no  longer  any  fear  of  inflation. 


BANKING  IN  CANADA.  229 

The  condition  in  the  United  States  under  which  the 
issue  of  currency  was  unduly  profitable,  and  the  fear  of 
inflation  was  present,  did  not  actually  last  many  years, 
but  it  lasted  long  enough  to  create  in  the  people  a  hatred 
of  banks  which  does  not  seem  yet  to  have  quite  passed 
away.  The  condition  which  followed  showed,  it  seems  to 
me,  conclusively  the  unsoundness  of  the  system  in  the 
matter  of  providing  an  elastic  currency,  a  currency  at  all 
times  adequate  in  volume.  The  currency  wants  of  the 
country  increased  with  the  great  increase  in  population, 
but  the  volume  of  National  Bank  currency  decreased  be- 
cause by  the  repayment  of  the  national  debt  and  the  im- 
provement in  the  national  credit  the  bonds  which  re- 
mained outstanding  yielded  so  low  a  rate  of  interest  as  to 
make  the  issue  of  National  Bank  notes  unprofitable.  The 
Comptroller's  statement  shows  that  the  volume  of  circu- 
lation secured  by  United  States  bonds,  which  ranged 
from  1866  to  about  1880  at  from  about  $300,000,000  to 
$350,000,000,  has  declined  until  the  amount  subject  to 
redemption  by  the  banks  is  now  only  about  $130,000,000. 
The  moral  of  this  is  plain.  If  the  Government  bonds 
yield  such  a  low  rate  of  interest  as  to  make  it  unprofitable 
to  issue  currency,  banks  will  not  provide  sufficient  cur- 
rency for  the  wants  of  the  country.  It  was  this  unfor- 
tunate contraction  which  to  a  great  degree  made  it  pos- 
sible for  the  Bland  Act  silver  issues,  from  1878  to  1890, 
to  create  so  little  financial  disturbance. 

I  hope  I  have  made  it  clear  that  if  the  business  of  issu- 
ing currency  against  Government  bonds  were  profitable, 
too  much  currency  would  be  the  result ;  and  if  it  were  un- 
profitable, too  little  would  be  issued.  We  would  require 
to  have  a  condition  of  things  under  which  the  profit  of 


280  BANKING  IN  CANADA. 

issuing  notes  would  at  all  times  bear  an  exact  relation  to 
the  amount  of  currency  required  by  the  country,  the  pro- 
fit therefore  changing  not  only  as  the  currency  rises  and 
falls  over  a  series  of  years,  but  at  the  time  of  the  sharp 
fluctuations  within  each  year,  already  referred  to.  No 
such  relation,  however,  could  very  well  exist  with  an  issue 
based  upon  Gk)vernment  bonds. 

Convertibility  and  Security. 

The  next  quality  in  a  currency  to  be  considered  is, 
*'That  it  should  be  readily  convertible  into  metallic 
money."  I  do  not  propose  to  discuss  this  at  length.  As 
I  have  pointed  out,  our  safety  lies  in  the  actual  daily  re- 
demption which  arises  out  of  our  circulation  being  gen- 
erally instead  of  specially  secured.  This  is  the  best  pos- 
sible safeguard  against  suspension  of  specie  payments. 
The  United  States  National  Banking  System  was  creat- 
ed during  a  suspension  of  specie  payments,  and  doubtless 
would  never  have  been  heard  of  but  for  that  fact. 

My  last  point  is  that  placed  first  by  Mr.  Palgrave  in 
his  discussion  with  the  English  bankers:  "That  the  cur- 
rency should  be  completely  secured."  I  do  not  know 
whether  we  are  to  understand  also  that  a  note  must  pass 
throughout  the  entire  country  without  discount  for  any 
reason,  but  I  include  that  in  the  point  to  be  discussed. 
Now,  I  contend  that  it  is  better  for  the  reasons  given, 
that  bank  issues  should  be  based  for  security  on  the  gen- 
eral assets  of  the  bank,  with  a  prior  lien  to  other  creditors ; 
and  also  that  taking  the  world  as  a  whole,  such  notes  will 
be  actually  safer  because  the  effect  of  a  system  of  notes 
secured  by  Government  bonds — a  loan  forced  by  the 
Government,  practically — must  sometimes  be  to  produce 


BANKING  IN  CANADA.  281 

national  bankruptcy,  as  in  the  case  of  the  Argentine 
Republic.  Still,  I  cheerfully  admit  that  the  United 
States  National  Banking  System  has  taught  us  that  a 
currency  issued  by  banks  may  be  made  to  pass  over  the 
entire  area  of  a  great  nation  without  discount.  This  is 
a  great  quality  in  currency.  To  the  ordinary  individual, 
who  knows  and  cares  little  about  banking  except  as  it 
affects  the  bank  note  he  happens  to  carry  in  his  pocket, 
it  appears  to  be  the  one  quality  necessary. 

In  Canada,  experience  has  shown  that  as  long  as  the 
notes  are  a  prior  lien  on  the  assets  of  the  bank,  including 
the  double  Hability,  ultimate  loss  is  scarcely  possible — 
has  not  at  all  events  occured  as  yet.  To  secure  their  cij*- 
culation  at  the  close  of  last  year  the  banks  had  $10.19  of 
assets  against  every  dollar  of  currency.  It  has  been 
pointed  out,  however,  that  the  assets  are  not  aggregated 
against  the  circulation,  and  that  all  banks  are  not  as  se- 
cure as  these  figures  seem  to  show.  But  the  security  in 
this  respect,  in  regard  to  each  bank,  varies  little  from  the 
general  average,  the  lowest  percentage  being  6.18  as 
against  the  general  average  of  10.19.  The  lowest  per- 
centage applies  to  but  two  or  three  small  banks,  none 
others  falling  below  about  $8  for  every  dollar  of  circula- 
tion. To  this  we  have  added  the  five  per  cent,  guarantee 
fund  appHcable  in  its  entirety  to  meet  the  notes  of  any 
individual  bank.* 


*  Financial  Facilities  for  Marketing  of  Farm  Products. — ^By  the  Bank 
Act,  chapter  29  E,  S.  1906,  it  was  provided  that  in  the  case  of  the  banks 
to  which  the  act  applied  the  total  amount  of  the  notes  in  circulation  at 
any  time  should  not  exceed  the  amount  of  the  unimpaired  paid-up  capi- 
tal. Amendments  to  this  act  made  by  chapter  7  of  the  session  of  the 
Dominion  Parliament  of  1908  provide  that  during  the  usual  season  of 
moving  the  crops,  viz.  from  October  1  to  January  31,  the  banks  may  ex- 
ceed this  limit  by  issuing  notes  to  an  amount  not  exceeding  15  per  cent 


232  BANKING  IN  CANADA. 

The  Borrower  and  the  Branch  System. 

In  discussing  the  banking  systems  in  older  countries, 
the  borrower  is  not  often  considered.  Men  must  borrow 
where  and  how  they  can,  and  pay  as  much  or  as  httle  for 
the  money  as  circumstances  require.  I  believe  too  strong- 
ly in  the  necessity  for  an  absolute  performance  of  en- 
gagements, to  think  that  it  is  a  requirement  in  any  bank- 
ing system  that  it  shall  make  the  path  of  the  debtor 
easy.  Every  banker  should  discourage  debt,  and  keep 
before  the  borrower  the  fact  that  he  who  borrows  must 
pay  or  go  to  the  wall.  But  in  America  the  debtor  class 
is  apt  to  make  itself  heard,  and  I  wish  to  show  what  our 
branch  system  does  for  the  worthy  borrower  as  compared 
with  the  United  States  National  Banking  System. 

In  a  country  where  the  money  accumulated  each  year 
by  the  people's  savings  does  not  exceed  the  money  requir- 
ed for  new  business  ventures,  it  is  plain  that  the  system 
of  banking  which  most  completely  gathers  up  these  sav- 
ings and  places  them  at  the  disposal  of  the  borrowers,  is 
the  best.  It  is  to  be  remembered  that  this  involves  the 
savings  of  one  slow-going  community  being  applied  to 
another  community  where  the  enterprise  is  out  of  pro- 
portion to  the  money  at  command  in  that  locality.  Now 
in  Canada,  with  its  banks  with  forty  and  fifty  branches, 
we  see  the  deposits  of  the  saving  communities  applied 
directly  to  the  country's  new  enterprises  in  a  manner 


of  the  combined  unimpaired  paid-up  capital  and  reserve  or  rest  fund. 
While  its  notes  in  circulation  are  in  excess  of  the  unimpaired  paid-up 
capital  any  bank  must  pay  interest  at  such  rate  not  exceeding  5  per 
cent,  per  annum  as  is  fixed  by  the  Governor  in  Council  on  the  excess  notes 
in  circulation  from  day  to  day,  the  interest -so  paid  to  form  part  of  the 
consolidated  revenue  fund.  The  object  of  these  amendments  is  to  pro- 
vide additional  financial  facilities  for  the  quick  transportation  of  Cana- 
dian farm  products  to  the  markets  of  the  world.  Special  provisions 
apply  to  the  Bank  of  British  North  America. 


BANKING  IN  CANADA.  233 

nearly  perfect.  The  Bank  of  Montreal  borrows  money 
from  depositors  at  Halifax  and  many  points  in  the  Mari- 
time Provinces,  where  the  savings  largely  exceed  the  new 
enterprises,  and  it  lends  money  in  Vancouver  or  in  the 
Northwest,  where  the  new  enterprises  far  exceed  the 
people's  savings.  My  own  bank  in  the  same  manner 
gathers  deposits  in  the  quiet  unenterprising  parts  of  On- 
tario, and  lends  the  money  in  the  enterprising  localities, 
the  whole  result  being  that  forty  or  fifty  business  cen- 
ters, in  no  case  having  an  exact  equilibrium  of  deposits 
and  loans,  are  able  to  balance  the  excess  or  deficiency  of 
capital,  economizing  every  dollar,  the  depositor  obtaining 
fair  rate  of  interest,  and  the  borrower  obtaining  money 
at  a  lower  rate  than  borrowers  in  any  of  the  colonies  of 
Great  Britain,  and  a  lower  rate  than  in  the  United  States 
except  in  the  very  great  cities  in  the  East.  So  perfectly 
is  this  distribution  of  capital  made,  that  as  between  the 
highest  class  borrower  in  Montreal  or  Toronto,  and  the 
ordinary  merchant  in  the  Northwest,  the  difference  in 
interest  paid  is  not  more  than  one  to  two  per  cent. 

In  the  United  States,  as  we  know,  banks  have  no 
branches.  There  are  banks  in  New  York  and  the  East 
seeking  investment  for  their  money,  and  refusing  to  al- 
low any  interest  because  there  are  not  sufficient  borrow- 
ers to  take  up  their  deposits ;  and  there  are  banks  in  the 
West  and  South  which  cannot  begin  to  supply  their 
borrowing  customers,  because  they  have  only  the  money 
of  the  immediate  locality  at  their  command,  and  have 
no  direct  access  to  the  money  in  the  East,  which  is  so 
eagerly  seeking  investment.  To  avoid  a  difficulty  which 
would  otherwise  be  unbearable,  the  western  and  southern 
banks  sometimes  rediscount  their  customers'  notes  with 


234  BANKING  IN  CANADA. 

banks  in  the  East,  while  many  of  their  customers,  not  be- 
ing able  to  rely  on  them  for  assistance,  are  forced  to  float 
paper  through  eastern  note-brokers.  But,  of  course,  the 
western  and  southern  banks  wanting  money,  and  the  east- 
ern banks  having  it,  cannot  come  together  by  chance,  and 
there  is  no  machinery  for  bringing  them  together.  So 
it  follows  that  a  Boston  bank  may  be  anxiously  looking 
for  investments  at  four  or  five  per  cent.,  while  in  some 
rich  western  state  ten  and  even  twelve  per  cent,  is  being 
paid.  These  are  extreme  cases,  but  I  have  quoted  an 
extreme  case  in  Canada,  where  the  capital  marches  auto- 
matically across  the  continent  to  find  the  borrower,  and 
the  extra  interest  obtained  scarcely  pays  the  loss  of  time  it 
would  take  to  send  it  so  far,  were  the  machinery  not  so 
perfect. 

Suppl3dng  Local  Wants. 

As  I  have  indicated,  it  should  be  the  object  of  every 
country  to  economize  credit,  to  economize  the  money  of 
the  country  so  that  every  borrower  with  adequate  secur- 
ity can  be  reached  by  some  one  able  to  lend,  and  the  mach- 
inery for  doing  this  has  always  been  recognized  in  our 
banks.  That  is  surely  not  a  perfect  system  of  banking 
under  which  the  surplus  money  in  every  unenterprising 
community  has  a  tendency  to  stay  there,  while  the  sur- 
plus money  required  by  an  enterprising  community  has 
to  be  sought  at  a  distance.  But  if  by  paying  a  higher  rate 
of  interest,  and  seeking  diligently,  it  could  always  be 
found,  the  position  would  not  be  so  bad.  The  fact  is, 
that  when  it  is  most  wanted,  distrust  is  at  its  height,  and 
the  cautious  Eastern  banker  buttons  up  his  pocket. 
When  there  is  no  inducement  to  avert  trouble  to  a  com- 


BANKING  IN  CANADA.  235 

munity  by  supplying  its  wants  in  time  of  financial  stress, 
there  is  no  inclination  to  do  so.  The  individual  banks,  East 
or  West,  are  not  apt  to  have  a  very  large  sense  of  respon- 
sibility for  the  welfare  of  the  country  as  a  whole,  or  for 
any  considerable  portion  of  it.  But  the  banks  in  Cana- 
da, with  thirty,  forty  or  fifty  branches,  with  interests 
which  it  is  no  exaggeration  to  describe  as  national,  can- 
not be  idle  or  indifferent  in  time  of  trouble,  cannot  turn  a 
deaf  ear  to  the  legitimate  wants  of  the  farmer  in  the 
prairie  provinces,  any  more  than  to  the  wealthy  merchant 
and  manufacturer  in  the  East.  Their  business  is  to 
gather  up  the  wealth  of  a  nation,  not  of  a  town  or  city, 
and  to  supply  the  borrowing  wants  of  a  nation. 

There  was  a  time  in  Canada,  about  twenty  years  ago, 
when  some  people  thought  that  in  every  town,  a  bank,  no 
matter  how  small,  provided  it  had  no  branches,  and  had 
its  owners  resident  in  the  neighborhood,  was  a  greater 
help  to  the  town  than  the  branch  of  a  large  and  powerful 
bank.  In  those  days,  perhaps,  the  great  banks  were  too 
autocratic,  had  not  been  taught  by  competition  to  re- 
spect fully  the  wants  of  each  community.  If  this  feeling 
ever  existed  to  any  extent  it  has  passed  away.  We  are, 
in  fact,  in  danger  of  the  results  of  over-competition.  I 
do  not  know  any  country  in  the  world  so  well  supplied 
with  banking  facilities  as  Canada.  The  branch  system 
not  only  enables  every  town  of  1,000  or  1,200  people  to 
have  a  joint  stock  bank,  but  to  have  a  bank  with  a  power 
behind  it  generally  twenty  or  fifty  times  greater  than 
such  a  bank  as  is  found  in  towns  of  similar  size  in  the 
United  States  would  have. 

But  one  of  the  main  features  of  the  branch  system  is 


236  BANKING  IN  CANADA. 

connected  intimately  with  our  power  to  issue  notes  based 
upon  the  general  assets  of  the  bank.  When  the  statement 
of  a  large  Canadian  bank  is  examined  by  an  American 
banker,  the  comparatively  small  amount  of  actual  cash 
must  be  noticeable.  He  will  notice  that  the  bank  is 
careful  to  have  large  assets  in  the  United  States  which 
may  be  taken  back  to  Canada  in  times  of  financial  strain 
there,  and  large  assets  in  convertible  shape  at  home,  but 
having  regard  to  actual  cash  as  the  machinery  for  carry- 
ing on  the  business  at  the  counter,  how  can  a  bank  with 
forty  or  fifty  branches  get  along  with  so  little  cash  ?  The 
simple  answer  is  that  the  tills  of  our  branches  are  filled 
with  notes  which  are  not  money  until  they  are  issued, 
and  which,  therefore,  save  just  that  much  idle  capital  and 
just  that  much  loss  of  interest. 

The  Depositor. 

The  legal  position  of  the  depositor  is  about  the  same 
in  both  countries.  The  note-holder's  claim  is  preferred 
to  his.  We  must  not,  however,  expect  that  any  govern- 
ment will  relieve  a  depositor  from  the  necessity  of  using 
discretion  as  to  where  he  places  his  money.  Governments 
never  have  done  and  never  can  do  that.  Men  must  look 
around,  and  after  measuring  the  security  offered,  judge 
where  they  should  entrust  their  money.  It  is  perhaps 
easier  for  a  man  with  limited  intelligence  to  make  a  selec- 
tion if  the  banks  have  large  capital  and  are  of  a  semi- 
national  importance,  provided,  of  course,  the  basis  of  the 
system  is  not  unsound,  as  in  Italy  and  Austria.  In 
Canada,  we  do  not  borrow  from  abroad,  although  we 
would  not  object  to  do  so  if  money  could  be  obtained 
at  low  enough  rates  of  interest;  our  banks  have  large 


BANKING  IN  CANADA.  237 

capital  and  small  deposits  relatively,  and  we  do  not  lend 
on  real  estate.  The  Government  statement  at  31st  De- 
cember, 1892,  shows  that  before  depositors  having  claims 
amounting  to  $180,000,000  can  suffer,  shareholders  must 
lose  in  paid-up  stock  and  double  liability  as  much  as 
$126,000,000  and  $25,000,000  of  surplus  funds,  in  all 
$151,00,000.  There  is  probably  no  country  in  the  world 
where  greater  security  is  offered  to  depositors. 

When  our  charters  were  under  discussion  two  or  three 
years  ago,  I  had  occasion  to  defend  our  system,  and  I 
have  copied  freely  from  a  pamphlet  I  wrote  at  that 
time.  I  must  not,  therefore,  omit  to  repeat  a  statement 
made  then,  which  might  excite  criticism  more  readily, 
now  that  the  banking  system  of  Australia  has  collapsed. 
In  making  a  comparison  between  individual  banks  with 
small  capital,  and  banks  with  branches  and  large  capi- 
tal, I  urged  that: — 

"The  probability  of  loss  to  the  depositor  in  one  bank 
"with  several  millions  of  capital,  is  less  than  the  proba- 
"bility  of  loss  to  some  of  the  depositors  in  ten  or  twenty 
"small  banks,  having  in  the  aggregate  the  same  capital 
"and  deposits  as  the  large  bank." 

The  retort  will  be  quickly  made: — "But  if  the  large 
"bank  fails,  the  ruin  will  be  just  so  much  the  more  wide- 
"spread." 

This  is  quite  true,  but  while  it  appears  to  be  an  answer 
to  the  point,  it  is  not.  If  the  conditions  of  two  countries 
are  about  the  same  and  the  ability  of  the  bankers  and  the 
principles  of  the  banking  system  are  in  other  respects- 
equally  excellent,  it  must  still  remain  true  that  the  pro- 


238  BANKING  IN  CANADA. 

bability  of  loss  to  the  depositors  in  one  or  more  of  the  ten 
or  twenty  small  banks  is  greater  than  the  prohahility  of 
loss  to  any  of  the  depositors  in  the  one  large  bank. 

Competitors  for  Deposits 

There  are  some  features  in  our  deposit  business  which 
may  be  interesting  to  Americans.  There  are  perhaps 
not  half  a  dozen  savings  banks,  as  the  term  is  understood 
in  North  America,  in  the  whole  of  Canada,  and  those 
only  in  the  largest  cities,  and  there  is  really  little  need  for 
the  existence  of  any.  The  Government  carries  on  the 
Post  Office  Savings  Bank  system,  copied  in  some  re- 
spects from  Great  Britain.  The  safeguards  always  nec- 
essary when  a  government  undertakes  to  carry  on  a  regu- 
lar business  are  so  many  and  so  tedious  that  the  leading 
banks  do  not  find  it  necessary  to  allow  as  high  a  rate  of 
interest  as  the  Government. 

In  addition  to  the  Government  we  have  as  competitors 
for  deposits  the  companies  authorized  to  lend  on  real  es- 
tate. Most  of  those  companies,  however,  now  borrow 
only  on  debentures  at  fixed  periods.  Some  of  this  money 
is  borrowed  in  Great  Britain,  but  much  of  it  is  obtained 
at  home.  I  may  say  here  that  while,  as  with  you,  banks 
have  fortunately  no  power  to  lend  on  real  estate,  the  re- 
striction is  perhaps  no  longer  necessary,  as  land  banking 
and  mercantile  banking  are  clearly  separated  in  the 
minds  of  every  intelligent  man  of  business  in  Canada. 
And  as  the  banks  do  not  buy  paper  made  for  the  purpose 
of  obtaining  money,  as  you  do  in  the  United  States,  but 
loan  only  to  their  own  customers,  supplying  their  entire 
wants,  and  seeing  that  the  money  is  to  make  or  move 
some  product  about  to  be  sold,  we  do  not  so  often  discover 


BANKING  IN  CANADA.  289 

that  we  have  unwittingly  been  booming  a  corner  lot, 
building  a  mill,  or  helping  to  float  a  company. 

Interest  on  Deposits. 

Returning  from  this  digression  to  the  subject  of  de- 
posits, I  have  to  deal  with  the  objection  that  we  pay 
interest  on  deposits.  I  am  aware  that  many  eminent 
bankers  in  the  United  States  have  expressed  the  opinion 
very  decidedly  that  it  is  inconsistent  with  sound  banking 
to  pay  interest  on  deposits.  On  the  other  hand,  bankers 
in  Great  Britain  and  in  Canada  would  say  that  any  sys- 
tem of  banking  which  will  not  afford  interest  on  certain 
classes  of  deposits  is  unsound.  I  must  hold  with  the  lat- 
ter opinion.  It  is  entirely  a  question  of  the  character  of 
the  deposit. 

Well-managed  Canadian  banks  do  not  give  interest 
on  active  current  accounts.  But  all  Canadian  banks  issue 
interest-bearing  receipts,  and,  as  you  will  have  gathered, 
all,  or  almost  all,  have  savings  departments.  These  de- 
posits, great  or  small,  are  in  the  nature  of  investments  by 
the  depositor,  and  are  not  like  the  temporary  balances  of 
a  merchant.  They  are  entitled  to  interest.  It  is  of  vital 
importance  to  every  nation  that  its  people  should  have 
the  saving  habit.  It  is  also  of  vital  importance  that  all 
the  money  disbursed  for  labor,  or  to  the  farmer  or  other- 
wise, should  find  its  way  back  as  early  as  possible  into  the 
channels  of  commerce.  Will  it  find  its  way  back  unless 
interest  is  offered  for  it? 

It  wiU  be  said  that  the  ordinary  savings  bank  is  the 
proper  organization  to  take  care  of  such  deposits.  So 
far  as  the  very  large  cities  are  concerned  this  may  be 


240  BANKING  IN  CANADA. 

quite  true.  But  is  the  ordinary  savings  bank  an  effec- 
tive instrument  for  collecting  the  miscellaneous  savings 
of  the  smaller  communities  ?  I  think  not.  Be  this  as  it 
may,  we  by  our  branch  system,  with  the  savings  depart- 
ment added,  provide  in  small  towns  where  the  ordinary 
savings  bank  is  impossible,  a  secure  place  of  deposit,  and 
the  quite  large  deposits  of  our  leading  banks  are  certain- 
ly the  accumulation  of  tens  of  thousands  of  such  deposi- 
tors. 

Banks  are  required  once  a  year  to  make  a  return  to  the 
Government,  which  is  published  as  a  blue-book,  of  all  un- 
claimed dividends,  deposits,  or  other  balances  of  five 
years'  standing. 

Bank  Inspection. 

We  have  in  Canada  no  pubUc  bank  examiner  as  in  the 
United  States,  nor  are  our  annual  statements  audited  as 
in  Austraha.  When  the  audit  system  was  proposed  we 
resisted  because  we  felt  that  it  pretended  to  protect  the 
shareholders  and  creditors,  but  did  not  really  do  so,  and 
if  the  audit  did  not  really  protect  it  seemed  better  that 
shareholders  and  creditors  should  not  be  lulled  by  im- 
aginary safeguards,  but  be  kept  alert  by  the  constant 
exercise  of  their  own  judgment.  So  far  as  we  have 
ever  discussed  with  the  Government  the  question  of 
public  bank  examiners,  apart,  of  course,  from  denying 
the  necessity  for  anything  of  the  kind,  we  have  confined 
our  arguments  to  pointing  out  the  impracticability  when 
banks  have  many  branches.  This  may  in  the  minds  of 
some  constitute  an  argument  against  branch  banking. 
I  simply  state  the  facts.    But  we  say  that,  while  it  may 


BANKING  IN  CANADA.  241 

be  very  well — if  it  really  does  lessen  bank  failures — to 
have  public  examiners  for  the  protection  of  the  people, 
it  is  much  more  necessary  with  branch  banking  to  have 
bank  examiners,  or  as  we  caU  them,  inspectors,  on  behalf 
of  the  executive  of  the  bank.  And  I  am  aware  that  the 
practice  is  growing  in  the  United  States  where  every- 
thing is  under  one  roof. 

When  it  comes  to  the  quality  of  the  work  done  by  our 
inspectors,  I  would  not  admit  that  anything  could  well 
be  l)etter.  In  my  own  bank  it  takes  five  trained  men 
an  entire  year  to  make  the  round  of  aU  the  branches. 
Some  of  these  officers  devote  themselves  to  the  routine  of 
the  branches,  verifying  all  cash,  securities,  bills,  accounts, 
etc.,  testing  the  compliance  of  officers  with  every  regula- 
tion of  the  bank,  reporting  on  the  skill  and  character  of 
officers,  etc.,  while  the  chiefs  devote  themselves  to  the 
higher  matters,  such  as  the  quality  of  the  bills  under  dis- 
count, loans  against  securities,  indeed  the  quality  and 
value  of  every  asset  found  at  the  branch.  They  also  deal 
with  the  growth  and  profitableness  of  the  branch,  its 
prospects,  etc.  Now  all  these  matters  have  already  passed 
the  judgment  of  the  branch  manager,  and  the  more  im- 
portant have  been  referred  to  and  approved  by  the  execu- 
tive, so  that  it  may  be  said  that  three  different  judgments 
are  passed  upon  the  business  of  the  branch.  But  it  will  be 
said  that  the  chief  inspector  may  be  under  the  sway  of 
the  executive  and  his  reports  a  mere  echo  of  the  opinion 
of  the  latter.  This  is  quite  true — the  reports  may  be  dis- 
honest. We  do  not  tell  the  pubHc  that  the  inspector  is 
specially  employed  for  its  protection.  He,  like  the  gen- 
eral manager,  is  merely  a  part  of  the  bank's  machinery 
for  conducting  business  and  the  public  is  left  to  iudee  of 

I.E. I..  Vol.  4-16  .^         o 


242    .  BANKING  IN  CANADA. 

the  bank  by  its  chief  officers,  its  record  in  the  past,  its 
entourage. 

Our  banks  make  a  very  full  return  to  the  Government 
at  the  close  of  each  month.  These  are  published  during 
the  month,  and  are  keenly  discussed  by  the  public.  The 
Deputy  Minister  of  Finance  has  the  power  to  call  for 
statements  of  any  character  at  any  time. 

In  the  larger  banks  the  officers  insure  their  fidelity  by 
funds  estabUshed  within  the  bank.  Many  of  the  banks 
also  have  funds  for  the  superannuation  of  their  officers. 

Reserves. 

With  regard  to  the  question  of  reserves,  we  hold  with 
the  majority  of  the  banking  world  outside  of  the  United 
States  against  fixed  reserves.  With  us  no  reserves  are 
actually  required  by  law.  The  cash  reserve  in  gold  and 
legal  tenders  has  averaged  for  some  years  about  ten  per 
cent.,  but  it  must  be  remembered  that  our  till  money  is 
almost  entirely  supplied  by  the  bank  note  circulation. 
The  smaller  banks  keep  their  available  resources  in  se- 
curities, call  loans  at  home,  and  balances  with  their  bank- 
ers in  Montreal  and  New  York.  The  large  banks,  as 
you  know,  in  addition  to  their  securities  and  call  loans 
in  Canada,  lend  largely  on  easily  hquidated  securities  in 
the  United  States. 

The  change-making  notes,  those  of  denominations  less 
than  $5,  are  issued  by  the  Dominion  Government.  The 
settlements  at  the  clearing  houses  are  made  in  legal  tend- 
ers, notes  of  large  denominations  being  issued  by  the 
Government  for  the  purpose.  Forty  per  cent,  of  what- 
ever cash  reserve  a  bank  may  keep  must  be  in  Dominion 
legal  tenders,  a  provision  entirely  in  the  interest  of  the 


BANKING  IN  CANADA.  243 

Government,  and  so  unworthy  of  our  otherwise  credit- 
able system  that  we  must  hope  our  Government  wiU 
some  day  reheve  us  of  such  an  unscientific  arrangement. 


Chartered  Banks  of  Canada. 

The  statistics  of  chartered  banks  in  Canada  show  that 
in  the  41  years  1868-1908  the  capital  paid  up  rose  from 
$30,507,447  to  $96,147,526,  the  Habilities  from  $45,144,- 
854  to  $762,077,184  and  the  assets  from$79,860,976  to 
$941,290,619.  The  totals  on  deposit  rose  during  the 
same  period  from  $33,653,594  to  $658,367,015  and  the 
notes  in  circulation  from  $9,350,646  to  $71,401,  697.  The 
deposits  in  banks  by  the  public  in  Canada  payable  on 
demand  increased  from  $104,424,203  in  1902  to  $169,- 
721,755,  and  payable  after  notice  from  $244,062,545 
to  $406,103,063.  The  total  deposits  by  the  public  pay- 
able on  demand  and  after  notice  increased  from  $348,- 
486,748  in  1902  to  $575,824,218  in  1908,  being  $62.93 
per  head  of  the  population  in  the  first  of  these  years  and 
$82.92  in  the  second.  Including  deposits  elsewhere  than 
in  Canada  and  balances  due  to  Dominion  and  Provin- 
cial Governments,  the  whole  amount  of  deposits  in  the 
banks  increased  from  $390,370,493  in  1902  to  $658,367,- 
015  in  1908.  These  figures  are  in  each  case  averages  com- 
puted from  the  monthly  returns.  The  assets  at  the  end 
of  December  1908  aggregated  $1,001,352,290. 


244  BANKING  IN  CANADA. 


Statbmbitp  Showiko  CJoHDmoK  or  thb  Tmarr-rsatn  O&abtssko 
Banks  or  Canada,  Seftehbbb  30,  1909. 

RESOtmcEa 

S»ecte „ $24,4rB,115 

Dominion  notes i 66,924,456 

Deposits  with  Dominion  government  for  security  of  note  circulation 4,589,(40 

Notes  and  checks  of  other  banlcs 36,476,053 

Loans  to  other  banks  in  Canada,  secured,  including  blUs  lediscounted 4,528,018 

Deposits  with  and  balances  due  from  other  banks  to  Canada 8,899,299 

3alano     '      "  ....---. 


12,121,278 


Balances  due  from  agencies  of  the  bank,  or  from  other  banks  or  agencies  in  the  United  King- 
dom  

Balances  due  from  agencies  of  the  bank,  or  from  other  banks  or  agencies  elsewhere  Qian  in 

Canada  and  the  United  Kingdom 

Dominion  and  provincial  government  securities 

Canadian  municipal  securities,  and  British  or  foreign  or  colonial  public  secoritles  other  than 

Canadian 23,307,111 

Railway  and  other  bonds,  debentures,  and  stocks 52,679,288 

Call  and  short  loans  on  stocks  and  bonds  in  Canada 56,124,620 

Call  and  short  loans  elsewhere  than  in  Canada , 131,634,384 

Current  loans  in  Canada 660,206,621 

Current  loans  elsewhere  than  in  Canada 32, 981, 183 

Loans  to  the  government  of  Canada 0 

Loans  to  provincial  governments 2,385,998 

Overdue  debts 7,473,439 

Real  estate  other  than  bank  premises „ 1,685,476 

Mortgages  on  real  estate  sold  Dy  the  bank 528,494 

Bank  premises 20,344,993 

Other  assets 11,090,100 


Total „ 1.107,371,570 

LIABILITIES. 

Capital  stock — 97,596,901 

Reserve  fund , „ „ 75,937,663 

Notes  in  circulation „  79,207,441 

Balance  due  to  Dominion  government  after  deducting  advances  for  credits,  pay  lists,  etc . ..  3, 730, 276 

Balance  due  to  provincial  governments 17,977,103 

Deposits  by  the  public  payable  on  d^nand  in  Canada '. 239,967,052 

Deposits  by  the  public  payable  after  notice  or  on  a  fixed  day  In  Canada 474,103,799 

Deposits  elsewhere  than  in  Canada 76,556,78ft 

Loans  from  other  banks  in  Canada,  secured,  including  bills  rediscounted 5, 137, 386 

Deposits  made  by  and  balances  due  to  other  banks 6,072,406 

Balances  due  to  agencies  of  the  bank,  etc.,  in  the  United  E^ingdom 3,803,11S 

Balances  due  to  agencies  of  the  bank  or  other  banks  or  agencies  elsewhere  than  in  Canada  and 

the  United  Kingdom „ 4,210,628 

Other  liabilities 9,011,247 

Excess  of  resources - „. 2135159,766 

Total ~ " U.{a,ZnjTOi 


CHAPTER  XII. 
BANK  CREDITS. 

BY  JAMES  G.  CANNON.* 

In  the  year  1892  there  were  not  more  than  a  half- 
dozen  credit  departments  in  as  many  banks  in  the  United 
States,  and  during  the  entire  period  of  the  existence  of 
the  American  Bankers'  Association,  from  1875  until  that 
date,' the  subject  of  "Bank  Credits"  had  never  been  dis- 
cussed in  a  practical  way  by  its  members.  Since  that 
time,  however,  the  subject  has  come  up  for  discussion  be- 
fore many  state  bankers'  associations  throughout  the 
country,  and  the  introduction  of  credit  departments  in 
banks  has  become  very  general. 

On  February  9,  1895,  the  executive  coromittee  of  the 
New  York  State  Bankers'  Association  adopted  resolu- 
tions recommending  to  its  members  "that  they  request 
borrowers  of  money  from  their  respective  institutions  to 
give  them  written  statements  over  their  signatures  of 
their  assets  and  liabilities,  in  such  form  as  the  conmiittee 
on  uniform  statements  of  the  various  groups  might  re-' 
commend."  Acting  upon  these  resolutions,  nearly  all 
of  the  groups  of  the  New  York  State  Bankers'  Asso- 
ciation adopted  uniform  statement  blanks,  and  the  ex- 
ample set  by  that  association  has  been  followed  by  many 
associations  in  other  states. 


'  Vice-president  of  the  Fourth  National  Bank,  New  York  City. 

245 


BANK  CEEDITS. 

In  1898,  the  National  Association  of  Credit  Men,  a 
large  and  powerful  organization  of  nearly  3,000  mem- 
bers, after  a  year's  investigation  of  the  subject,  adopted 
uniform  statement  blanks  which  have  ever  since  been 
widely  employed. 

On  September  7,  1899,  the  American  Bankers'  Asso- 
ciation, in  convention  assembled  at  Cleveland,  Ohio, 
adopted  a  uniform  property  statement  blank,  to  be  sup- 
plied to  its  members,  and  thus  placed  the  stamp  of  its  ap- 
proval upon  the  credit  department  for  banks,  at  the  same 
time  instnlcting  its  secretary  to  set  up  in  his  office  a 
model  department,  and  to  furnish  information  to  its 
members  regarding  the  working  of  the  same. 

These  efforts  were  practically  the  beginning  of  credit 
research,  and  as  we  trace  the  subject  during  the  past 
twelve  years  and  note  the  growth  of  these  methods  and 
the  many  difficulties  which  have  been  overcome,  we  cer- 
tainly feel  that  something  has  been  gained  by  the  agita- 
tion and  discussion  of  bank  credits,  and  much  good  has 
been  accomplished. 

The  Laws  Governing  Credit. 

In  an  address  in  June,  1896,  at  the  organization  of  the 
National  Association  of  Credit  Men,  I  stated:  "Credit 
can  hardly  be  classed  among  the  sciences,  and  certain- 
ly it  cannot  be  said  to  be  an  exact  science,  because  it  is  not 
governed  by  any  definite,  fixed  laws."  But  after  years 
of  study  of  this  subject,  I  am  beginning  to  feel  that 
there  are  certain  definite,  fixed  laws  governing  credit, 
and  I  am  prepared  to  take  a  step  forward  to-day,  desig- 
nating it  credit  science,  and  I  hope  to  be  able  to  show 
some  of  its  principles,  its  mechanism,  and  its  guiding 
rules. 


BANK  CEEDITS.  247 

It  is  evident  to  students  of  financial  affairs  that  there 
has  been  a  gradual  change  of  method  in  the  buying  and 
selling  of  commercial  paper  from  that  which  obtained  in 
former  times.  Borrowers  no  longer  confine  themselves 
to  one  place,  but  go  where  funds  can  be  produced  to 
the  greatest  advantage.  Merchants  in  the  smaller  towns 
go  away  from  home  to  borrow  money,  and  bankers  in 
smaller  cities  go  away  from  home  to  procure  invest- 
ments. Often  bankers  do  not  feel  that  they  can  break 
the  rate  locally,  but  it  frequently  happens  that  they  will 
send  to  the  large  money  centers  and  buy  the  paper  of 
their  home  merchants  at  a  lower  rate  than  they  would  feel 
that  they  could  take  the  note  for  direct.  One-eighth  per 
cent  will  take  many  a  business  man  from  home  for  his 
accommodation.  The  practice  is  growing  for  the  banks 
in  larger  cities  to  buy  commercial  paper  for  their  corres- 
pondents and  in  the  face  of  these  changes  in  method  it 
becomes  more  and  more  imperative  for  bankers  who 
handle  commercial  paper,  and  who  at*e  located  in  the 
large  money  centers,  to  be  fully  informed  in  the  widest 
measure  upon  the  credit  of  borrowers. 

We  have  noted  the  beginnings  of  credit  science;  we 
have  briefly  traced  its  interesting  and  rapid  development 
during  the  past  twelve  years,  and  we  have  marked  the 
changes  in  methods  which  are  caUing  for  constantly  im- 
proved ways  and  means  of  credit  research.  Let  us  take 
the  measure  of  the  credit  science  of  to-day  in  a  few  words 
before  we  consider  the  problems  and  prospects  of  the  fu- 
ture. 

Statements  from  Borrowers. 

The  corner-stone  of  credit  science  may  be  said  to  be 
the  requiring  from  borrowers  of  statements  of  the  con- 


248  BANK  CREDITS. 

ditions  of  their  affairs.  This  has  now  become  an  accepted 
custom  in  the  relation  between  banks  and  borrowers  on 
commercial  paper.  It  has  come  to  be  recognized  that  the 
practice  is  of  value  to  both  the  bank  and  the  borrower, 
and  this  may  be  considered  the  reason  for  its  success. 
Furthermore,  the  making  of  statements  oftentimes  ren- 
ders concerns  themselves  aware  of  weaknesses  in  their 
methods  of  operation,  financial  practices  and  results  of 
business.  The  banker,  having  a  substantial  interest  in  the 
success  of  the  borrower,  may  frequently  give  wholesome 
advice  or  timely  warning  from  his  wide  experience  in 
commercial  affairs  and  his  foresight  in  monetary  mat- 
ters. 

There  is  a  distinct  parallel  in  the  results  that  have 
worked  out  from  the  practice  of  giving  statements,  to 
the  results  with  which  we  are  f amiUar  in  the  methods 
of  the  national  banking  system.  Here  statements  of 
conditions  and  bank  examinations  have  resulted  in  wise 
improvement  in  our  methods,  in  wholesome  safeguard- 
ing of  our  funds,  in  conservative  financing,  and  in  gen- 
eral advantage. 

Again,  there  is  a  parallel  in  the  results  which  have 
developed  from  the  mutual  relations  of  manufacturers 
and  the  factory  mutual  insurance  companies.  Here  the 
companies  called  for  improvements  in  buildings  and 
equipment,  which  have  rendered  fire  a  remote  contin- 
gency. Whoever  doubts  the  joint  interest  of  such  a 
movement  has  never  experienced  the  paralyzing  effect 
which  a  fire  has  upon  the  affairs  of  any  concern.  The 
statement  of  condition  has  come  to  stay,  and  is  funda- 
mental in  credit  matters. 


BANK  CREDITS.  249 

The  Credit  Department. 

But  if  the  statement  is  the  foundation  of  the  credit 
structure,  the  credit  department  may  be  considered  to  be 
the  superstructure.  This  division  of  the  bank's  operat- 
ing mechanism  may  be  said  to  be  the  clearing-house  for 
credit  information,  the  headquarters  for  credit  analysis, 
the  storehouse  of  facts  relating  to  those  who  are  commer- 
cial borrowers  of  the  bank's  money.  Our  credit  men  are 
the  watchdogs  of  the  bank's  risks  and  the  guardians 
of  the  investments  made  for  its  correspondents.  The  de- 
partment must  be  manned  by  our  most  faithful,  rehable, 
intelligent,  tactful  men,  who  must  be  capable  of  infinite 
pains,  of  inexhaustible  patience,  and  of  absolute  loyalty. 
Their  eyes  and  ears  must  be  open  to  every  contingency 
that  no  sign  may  go  unheeded.  They  are  compelled  to 
walk  in  the  ruts  of  routine  and  yet  be  pathfinders  con- 
stantly. No  man  who  works  mechanically  will  develop 
into  a  successful  credit  man. 

The  credit  department  should  have  an  equipment  com- 
mensurate with  its  importance.  It  should  be  the  inner 
chamber  in  all  respects.  Recorded  confidences  should 
never  be  violated,  and  there  should  be  no  latchstring  to 
this  department.  Its  mechanism  of  blanks,  files,  vaults, 
and  office  fixtures  should  be  perfectly  adapted  to  its  ser- 
vice, and  every  means  which  ingenuity  can  devise  should 
be  utilized  to  assist  its  work. 

Analysis  of  Statements. 

In  our  reviews  of  the  credit  science  of  to-day  we 

have  noted  the  universal  custom  of  giving  statements. 

We  have  glanced  over  the  mechanism  provided  for  the 

handling  of  these  statements  and  correlated  data,  but 


250  BANK  CEEDITS. 

the  important  feature  of  all  credit  science  is:  What  is 
our  interpretation  of  these  statements?  I  wish  to  make 
clear  my  conviction  that  a  statement  which  is  not  sub- 
mitted to  analysis  is  a  menace.  Because,  first,  if  errors 
have  been  made,  if  lack  of  judgment  on  the  part  of  the 
management  of  the  concern  has  been  shown  which  is  not 
brought  to  the  attention  of  the  borrower;  if  reckless 
methods  have  been  indulged  in  or  any  dishonesty  has  been 
practised,  the  very  fact  that  a  statement  has  been  re- 
ceived and  accepted  by  a  banker  either  lulls  into  a  sense 
of  security  the  careless  or  heedless  borrower,  confirms  the 
reckless  financial  habit,  or  estabhshes  the  dishonesty  if 
such  exists.  I  repeat,  that  an  unanalyzed  statement  is 
worse  than  no  statement  at  all. 

Frank  and  open  statements  bearing  upon  their  face 
the  evidence  of  a  true  condition  of  affairs,  are,  to  my 
mind,  the  greatest  factors  in  establishing  credit.  Noth- 
ing will  more  firmly  cement  the  union  between  borrower 
and  banker  than  such  a  statement,  and  nothing  will  be 
of  more  value  to  a  banker  and  of  less  harm  to  an  honest, 
enterprising  borrower.  Hidden  facts  are  revealed  by  an- 
alysis and  skill  in  reading  between  the  hues  is  an  im- 
portant part  of  the  credit  man's  training.  By  this  means 
weaknesses  may  frequently  be  discovered  and  proper 
steps  taken  to  avert  trouble  before  acute  difficulty  arises. 

Principles  and  Rules  of  Credit  Science. 
Let  us  summarize,  then,  the  principles  and  rules  of  the 
credit  science  of  to-day. 
Its  principles: 

1.  To  reduce  losses. 

2.  To  eliminate  disproportionate  risks. 


BANK  CREDITS.  251 

8.     To  conserve  worthy  interests. 

4.     To  war  on  dishonesty  and  incompetence. 

Its  mechanism: 

1.  The  statement  of  condition,  including — 
Assets  and  liabilities. 

Annual  business. 

Net  result  of  business. 

Commercial  expenses. 

2.  The  credit  department. 

Its  guiding  rules  in  the  present  state  of  bank  credits : 
Rule  No.  1.     Quick  assets  only  are  a  basis  for 

loans. 

Rule  No.  2.     Fixed  assets  only  considered  as 

giving  an  unknown  support  to  the  quick  assets. 
Rule  No.  3.     The  debt  limit  of  the  borrower 

has  been  exceeded  when  his  liabilities  exceed  50 

per  cent  of  his  quick  assets  (the  so-called  50  per 

cent  credit  rule). 

Accuracy  is  Required. 
Having  made  a  careful  review  of  the  credit  science  of 
today,  let  us  turn  to  a  consideration  of  what  shall  be  the 
next  step  in  its  development.  At  the  outset  we  remarked 
that  there  was  a  growing  requirement  that  bankers  in 
large  money  centers  should  be  expert  in  credit  matters ; 
it  is  necessary,  therefore,  that  the  means  or  mechanism  by 
which  we  are  to  inform  ourselves  should  be  kept  fully 
abreast  of  the  times.  Permit  me  to  state  my  conclusfon 
that  the  next  step  in  the  development  of  credit  science 
will  be  in  the  direction  of  accuracy.  The  trend  of  every 
science  is  toward  exactness.  The  advance  to  this  point 
justifies  a  further  step  in  advance.    Lower  rates  of  in- 


252  BANK  CREDITS. 

terest  on  loans  make  losses  intolerable.  General  pros- 
perity and  other  conditions  with  which  we  are  familiar 
have  limited  the  field  for  commercial  loans  at  paying 
rates  and  require  us  carefully  to  safeguard  any  ex- 
tension of  the  field  of  loans  by  exact  and  accurate  credit 
tests. 

How  shall  this  next  step  be  taken?  By  establishing 
the  custom  of  requiring  statements  of  financial  condition 
to  bear  joint  certificates  of  a  certified  public  accountant 
and  of  an  engineer: — 

1.  As  to  the  valuation  of  cash  assets. 

2.  As  to  valuation  of  merchandise  assets. 

3.  As  to  valuation  of  plant  assets. 

4.  As  to  liabihties. 

5.  As  to  net  worth. 

6.  As  to  gross  business. 

7.  As  to  past  results  of  business. 

8.  As  to  future  prospects. 

Value  of  the  Accountant. 
The  certified  pubhc  accountant  has  come  into  prom- 
inence within  the  last  ten  years  and  his  profession  has  the 
guarantee  of  law  in  most  states  of  the  Union.  He  con- 
cerns himself  with  the  books  of  account,  and  records  and 
statements  prepared  by  him  have  the  support  of  such 
books,  and  the  banker  has  the  sense  of  security  due  to  the 
disinterested  and  impartial  nature  of  the  accountant's 
position.  He  may  be  called  the  referee  in  accountancy 
and  the  expert  on  cash  valuations. 

Value  of  the  Engineer. 
The  engineer  deals  with  physical  matters.     His  val- 
uation on  merchandise  is  essential  in  determining  quick 


BANK  CREDITS.  253 

assets.  He  concerns  himself  with  the  valuation  of  the 
fixed  assets  and  the  adaptability  of  the  plant  to  the  pur* 
poses  for  which  it  is  being  used.  His  analysis  of  all  cor- 
related questions  respecting  raw  supplies,  vulnerabihty 
to  competition,  price  fluctuations,  trade,  and  similar  con- 
ditions is  essential  to  a  right  interpretation  of  statements 
of  concerns  affected  by  such  questions. 

Inaccurate  and  Dishonest  Statements. 
But  why  is  this  radical  step  made  necessary?  Because 
inaccurate  and  dishonest  statements  are  being  constantly 
received.  Many  statements  reach  us  which  are  made  by 
irresponsible  parties — clerks  and  under-men — and  the 
management  is  frequently  in  ignorance  of  true  condi- 
tions.   Protection  against  such  is  essential. 

All  Benefited  by  Examination. 

The  radicalness  of  the  step  is  only  apparent,  not  real — 
as  all  will  be  benefited  by  the  examination  proposed. 
The  interpretation  of  credit  statements  is  a  technical  op- 
eration, and  the  statements  prepared  by  trustworthy  pro- 
fessional men  are  generally  more  reliable  than  those  not 
so  prepared.  The  hard  and  fast  50  per  cent  credit  rule 
will  soon  fail,  and  an  exact  and  accurate  study  of  each 
individual  concern  will  take  its  place,  each  concern  being 
entitled  to  credit  on  its  merits.  Working  on  imperfect 
information  and  applying  one  credit  rule  has  resulted 
necessarily  in  a  destructive  policy.  Accuracy  will  enable 
us  to  follow  a  constructive  pohcy,  which  I  believe  is  more 
nearly  in  accord  with  our  position  in  the  business  world. 

In  brief,  our  next  step  is  in  the  direction  of  accuracy. 
This  is  to  be  accomplished  by  having  statements  sub- 
jected to  searching  analysis  certified  to  by  certified  pub- 


254  BANK  CREDITS. 

lie  accountants  and  engineers,  and  then  credit  will  be  ex- 
tended strictly  on  the  merit  of  the  individual  applying 
for  loans. 

Practical  Features  of  Bank  Credits. 
We  are  a  practical  people  who  are  more  given  to  con- 
sideration of  improving  our  methods  than  to  reflection 
upon  our  existing  greatness  or  that  of  our  predecessors. 
For  that  reason  I  have  up  to  this  time  devoted  your  atten- 
tion to  progress  in  methods  and  means  of  credit  research. 
I  will  now  turn  your  attention  to  some  practical  features 
of  the  business  we  are  doing  based  on  bank  credits.  I 
have  been  much  interested  in  determining  the  relative 
volume  of  bank  loans  on  commercial  paper  to  the  various 
classes  of  borrowers.  While  this  relation  undoubtedly 
fluctuates  widely  it  is  my  conclusion  that  the  following 
statement  reflects  about  the  average  condition: 

Per  cent 
Conmiercial  loans  by  banks  to  manufacturers  ....   50 
Commercial  loans  by  banks  to  commission  men  ...   15 

Commercial  loans  by  banks  to  jobbers 30 

Commercial  loans  by  banks  to  retailers 5 


100 
This  was  ascertained  from  the  distribution  of  186  dif- 
ferent loans,  aggregating  upward  of  thirteen  million 
dollars.  The  average  distribution  of  some  sixty  million 
dollars  of  loans  placed  through  brokers  in  New  York 
gave  the  following  relative  proportions: 

Per  cent 
Commercial  loans  through  brokers    to   manufac- 
turers     45 


BANK  CREDITS.  255 

Commercial  loans  through  brokers  to  commission 

men    15 

Commercial  loans  through  brokers  to  jobbers  ....   30 
Commercial  loans  through  brokers  to  retailers  ...   10 


100 

The  striking  preponderance  of  loans  from  banks  to 
manufacturers  is  evident  from  both  of  these  statements. 
It  becomes  of  interest  to  us,  then,  to  study  further  these 
various  classes  of  borrowers,  and  I  have  prepared  from 
the  statements  of  some  one  hundred  concerns  a  set  of 
typical  balance  sheets  that  will  bring  before  us  some 
credit  features,  which  it  will  be  of  profit  to  us  to  study 
with  care. 

T3rpical  Balance  Sheets. 
Typical  balance  sheet  for  manufacturers. 

Number  of  concerns  averaged .  62 

Per  cent 

Quick  assets   $1,000,000  44. 

Fixed  assets  1,270,000  5Q 

Total  assets $2,270,000  100 

Liabilities    610,000  27 

Net  worth $1,660,000  73 

Liabilities  61  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets $3.30 

for  44  concerns. 
Gross  sales  per  $1  total  assets 1.60 

for  44  concerns. 


256  BANK  CEEDITS. 

Typical  balance  sheet  for  commission  men. 

Number  of  concerns  averaged 7 

Per  cent 

Quick  assets   $1,000,000  95 

Fixed  assets   50,000  5 

Total  assets $1,050,000  100 

Liabilities    520,000  50 

Net  worth   $  530,000  50 

Liabilities  52  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets $3.60 

Gross  sales  per  $1  total  assets 3.45 


Typical  balance  sheet  for  jobbers. 

Number  of  concerns  averaged 28 

Per  cent 

Quick  assets $1,000,000  90 

Fixed  assets  110,000  10 

Total  assets $1,110,000  100 

Liabilities   440,000  40 

Net  worth $    670,000  60 

Liabilities  44  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets $2.25 

on  25  concerns. 
Gross  sales  per  $1  total  assets 2.08 

on  25  concerns. 


BANK  CREDITS.  257 

Typical  balance  sheet  for  retailers. 

Number  of  concerns  averaged 6 

Per  cent 

Quick  assets   $1,000,000  75 

Fixed  assets  830,000  25 

Total  assets $1,330,000  100 

Liabilities    480,000  36 

Net  worth $    850,000  64 

Liabilities  48  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets $2.33 

on  5  concerns. 
Gross  sales  per  $1  total  assets 1.82 

on  5  concerns. 


The  exactness  of  these  relations  is  not  important  for 
our  study  of  the  principles  involved  in  credit  research. 
Suffice  it  to  say  that  a  study  of  the  several  balance  sheets 
will,  I  believe,  disclose  interesting  comparisons.  It  is  in- 
structive to  note  in  these  balance  sheets  the  relative  pro- 
portion of  quick  to  total  assets : 

Per  cent 
Manufacturers  have  quick  assets  of  total  assets  ...  44 
Commission  men  have  quick  assets  of  total  assets  . .  95 

Jobbers  have  quick  assets  of  total  assets 90 

Retailers  have  quick  assets  of  total  assets 75 

What  stronger  argument  could  we  have  for  accuracy 
in  our  credit  methods  than  that  manufacturers,  who  bor- 
row one-half  the  money  loaned  on  commercial  paper, 
have  56  per  cent  of  their  assets  in  such  form  that  we  re- 

I.B.L.  Vol.  4—17 


258  BANK  CREDITS. 

ject  them  as  unknown  and  unknowable  on  account  of  our 
imperfect  information  and  inability  to  determine  their 
value? 

Net  Worth  of  Borrowers. 

Again,  referring  to  these  balance  sheets,  let  us  com- 
pare the  net  worth  of  these  classes  of  borrowers: 

Manufacturers  show  net  worth  73  per  cent  of  their  as- 
sets. 

Commission  men  show  net  worth  50  per  cent  of  their 
assets. 

Jobbers  show  net  worth  60  per  cent  of  their  assets. 

Retailers  show  net  worth  64  per  cent  of  their  assets. 

From  the  face  of  this  statement  the  manufacturer 
maintains  an  eminently  satisfactory  margin  behind  his 
loans,  and  what  we  will  want  to  know  in  the  future  is 
that  this  claimed  margin  is  conservatively  valued. 

Let  us  now  examine  into  the  gross  sales  which  tell  the 
tale  of  the  entire  managerial  activity,  the  mobility  of  the 
quick  or  working  capital: 

Manufacturers,  gross  sales  per  $1  quick  assets  ....  $3.30 
Commission  men,  gross  sales  per  $1  quick  assets  . .  3.60 

Jobbers,  gross  sales  per  $1  quick  assets 2.25 

Retailers,  gross  sales  per  $1  quick  assets 2.33 

Here  we  are  face  to  face  with  the  most  telling  factor 
against  a  hard  and  fast  credit  test,  in  that  the  wide  dif- 
ference in  results  in  the  various  lines  of  business  are 
brought  out.  How  can  a  uniform  credit  test  be  applied 
to  such  widely  varying  lines  of  business? 

Of  equal  importance  in  showing  the  variations  in  dif- 
ferent hues  of  commercial  enterprise  are  the  figures  com- 
paring the  gross  business  done  per  $1  of  total  assets,  rep- 


BANK  CREDITS.  259 

resenting  as  it  does  the  total  investment  in  plant  and 
working  capital: 

Manufacturers,  gross  sales  per  $1  total  assets  . . .  .$1.60 
Commission  men,  gross  sales  per  $1  total  assets  . . .   3.45 

Jobbers,  gross  sales  per  $1  total  assets 2.08 

Retailers,  gross  sales  per  $1  total  assets 1.82 

Failure  of  Uniform  Credit  Tests. 

Becoming  more  specific  in  our  inquiry  we  may  also 
come  to  the  conclusion  that  if  a  uniform  credit  test  fails, 
when  applied  to  various  lines  of  business,  such  as  manu- 
facturing, jobbing,  etc.,  it  will  also  fail  when  applied  to 
various  branches  of  the  same  line  of  business. 

The  following  figures  taken  from  the  twelfth  census 
of  the  United  States  will  illustrate  the  wide  variations 
among  manufacturing  interests.  In  1900  the  census  re- 
port, covering  the  various  branches  of  the  manufactur- 
ing division  of  commercial  affairs  showed  a  proportion 
of  working  capital  to  total  capital  as  follows : 

Number  Concerns  Per  Cent. 

Food  products   . .  61,302  Working  cap.    46  Total  cap. 

Textiles 30,048 

Iron  and  Steel...  13,896 

Limiber 47,079 

Leather 16,989 

Paper  and  pr'nt'g.26,747 

Liquors   7,861 

Chemicals   5,444 

Clay,  glass,  etc..  14,809 

Metals 16,305 

Tobacco 15,252 


(< 

<( 

54 

it 

<( 

« 

50 

tt 

« 

« 

45 

tt 

(( 

tt 

72 

tt 

« 

tc 

40 

it 

a 

tt 

41 

tt 

i( 

tt 

51 

it 

« 

tt 

37 

tt 

<< 

tt 

52 

tt 

<< 

tt 

76 

tt 

260 


BANK  CKEDITS. 


Vehicles  for  land 

transportation   .10,113  "  "     58       "       " 

Shipbuilding   ....   1,116  "  "     4,5       "       " 

There  will  be  noted  a  fluctuation  from  37  per  cent  to 
76  per  cent  and  the  entire  industry  averaged  48.8  per 
cent,  these  variations  emphasizing  the  futility  of  uniform 
credit  tests. 

The  census  report  also  gave  some  interesting  f  aicts  re- 
garding the  fluctuations  in  the  gross  business  per  $1 
working  capital  and  $1  total  capital  as  shown  below: 


Gross 

Gross 

Business 

Business 

Number 

Per  $1 

Per  $1. 

Concerns. 

Working  Cap. 

Total  Cap. 

Food  products  . .  .61,302 

$5.22 

$2.42 

Textiles 30,04.8 

2.24 

1.20 

Iron  and  steel...  13,806 

2.83 

1.17 

Lumber 47,079 

2.40 

1.09 

Leather 16,989 

2.35 

1.17 

Paper  and  printing 

26,747 

2.70 

1.09 

Liquors                      7,861 

1.96 

.79 

Chemicals                  5,444 

2.17 

1.11 

Clay,  glass,  etc.      14,809 

2.28 

.88 

Metals                     16,305 

8.52 

1.88 

Tobacco                 15,252' 

3.02 

^.28 

Vehicles  for  land 

transportation     10,113 

2.42 

1.21 

10,113 

2.42 

1.21 

Shipbuilding             1,116 

2.14 

.97 

Average 

$2.70 

$1.82 

BANK  CREDITS.  261 

Observing  this  it  will  be  noted  that  the  gross  busi- 
ness per  $1  of  working  capital  varied  from  $1.96  to 
$5.22.  The  gross  business  per  $1  of  total  capital  varied 
from  79  cents  to  $2.42.  Does  this  not  further  empha- 
size the  fact  that  hues  of  business  should  be  judged, 
strictly  on  their  individual  merits,  rather  than  by  hard 
and  fast  rules? 

It  would  be  interesting,  if  we  had  time,  to  compare 
many  of  the  branches  of  these  industries  which  vary  even 
more  widely  than  the  grand  division  of  manufacturers. 
Every  consideration  seems  to  inipress  the  fact  that  one 
of  the  cardinal  and  fundamental  principles  of  credit 
science  must  be  accuracy  in  all  the  term  implies.  This 
forces  us  to  the  conclusion  that  the  50  per  cent  credit 
rule  as  regards  quick  assets  to  liabiHties  will  not  long 
be  the  chief  factor  in  fixing  upon  the  responsibility  of 
borrowers  in  the  light  of  the  variation  among  the  various 
classes  enumerated.  The  time  is  coming  when  we  shall 
be  compelled  to  secure  information  which  is  accurate  and 
reliable,  and  which  has  behind  it  the  weight  of  certi- 
fication and  proof. 

To  Encourage  Mannfacturers. 

As  to  the  future:  We  are  naturally  looking  forward 
to  extending  commercial  loans  at  paying  rates  of  inter- 
est. Inasmuch  as  loans  which  are  secured  by  assets  not 
readily  convertible  into  cash  are  those  which  are  subject 
to  higher  rates,  it  seems  probable  that  the  field  of  the 
manufacturers,  now  representing  fully  one-half  of  the 
loans  direct  from  banks,  is  entitled  to  the  most  careful 
consideration  in  the  study  of  bank  credits,  and  is  of  such 


262  BANK  CREDITS. 

importance  as  to  demand  of  us  intelligent  examination 
and  scientific  treatment. 

The  manufacturers  of  the  United  States,  numbering 
upwards  of  500,000  concerns,  have  a  gross  business  of, 
probably,  $13,000,000,000,  requiring  an  investment  in 
plant  and  working  capital  of  $10,000,000,000,  the  work- 
ing capital  being  something  under  $500,000,000 — a  vol- 
ume of  business  and  extent  of  investment  which  is  stu- 
pendous in  the  extreme.  The  manufacturer  is  essen- 
tially the  prime  mover  of  commerce,  and  has  to  carry  a 
large  investment  in  plant  and  machinery.  Invention  and 
improvement  of  machinery  and  products  are  continuous, 
thus  making  large  inroads  into  his  sinking  fund  for  re- 
newals and  scrapped  machinery.  He  must  maintain 
large  stocks  of  raw  material  and  be  secure  in  the  con- 
tinuity of  his  supphes.  He  must  carry  large  values  of 
goods  in  process.  He  must  risk  the  fluctuations  in  the 
cost  of  raw  materials  and  sales  value  of  his  finished  goods. 
He  must  take  chances  on  changes  in  style  and  be  at  the 
mercy  of  the  caprice  of  fashion.  All  of  these  consider- 
ations should  lead  us  to  count  upon  the  manufacturer 
as  siibstantial,  conservative,  keen  after  business,  acute  for 
economies ;  and  the  extent  of  his  investment  should  give 
him  such  an  intense  personal  interest  in  his  enter- 
prise that  we  should  expect  to  find  him  the  most  promis- 
ing of  our  applicants  for  loans.  But  to  handle  this 
business  safely  and  wisely  demands  accuracy  in  our 
credit  methods. 

Importance  of  Credit  Science. 
In  conclusion,  permit  me  to  say  that  credit  science  oc- 
cupies a  prominent  place  in  commercial  affairs.    The  re- 


BANK  CREDITS.  263 

quirement  of  credit  is  a  proper  and  necessary  condi- 
tion of  business,  and  the  usefulness  of  credit  is  firmly 
established.  Every  consideration  demands  of  us  that 
as  this  science  develops  it  shall  be  firmly  established  in 
all  respects  upon  substantial  principles,  and  that  as  its 
rules  and  customs  are  unfolded  from  time  to  time  they 
shall  serve  to  strengthen  jointly  the  bank  in  extending 
credit  and  the  borrower  in  taking  advantage  of  the  credit. 

It  will  require  joint  and  harmonious  action  on  the 
part  of  all  interested  in  bank  credits  to  successfully  ac- 
complish the  forward  step  which  has  been  outlined  in 
these  remarks,  but  if  this  is  accomphshed,  judging  from 
our  experience  in  the  past,  the  results  will  be  of  surpass- 
ing value  to  the  entire  commercial  community. 

Let  us  restate,  then,  the  principal  facts  regarding  this 
advance  step: 

1.  It  shall  be  in  the  direction  of  accuracy. 

2.  Statements  of  condition  shall  be  required  of  bor- 
rowers, bearing  the  certificate  of  certified  public  ac- 
countants and  of  engineers. 

3.  Statements  of  condition  shall  be  invariably  ana- 
lyzed faithfully  and  accurately,  and  with  all  the  thor- 
oughness, weight  of  experience,  and  knowledge  which 
can  be  brought  to  bear  upon  them  by  our  best  organiza- 
tion and  equipment. 


To  THE  FIRST  NATIONAL  BANK  Of  CHICAGO 
Finn  •Name.  , 


Business  — 


Branches  If  any,. 


For  the  purpose  of  procuring  credit,  from  time  to  time,  with  the  above  bank  for  our  negotiable  paper, 
or  otherwise,  we  furnish  the  following  as  being  a  fair  and  accurate  statement  Of  our  finsmclal  condition 
on  the    _    ..  ..  day  of . 190- 


LIABILITIES 


Statement  of  Conditieii—Pajrtiiership. 


CHAPTER  XIII. 
THE  COMPTROLLER'S  OFFICE. 

BY  JAMES  H.  ECKELS^ 

Former  Comptroller  of  the  Currency  and  President  of  the  Com- 
mercial National  Bank  of  Chicago. 

The  office  of  the  Comptroller  of  the  Currency  was 
created  by  an  act  of  Congress  passed  in  1863.  The 
duties  defined  by  the  statute  were  that  he  should  have  the 
supervision  of  banks  to  be  organized  throughout  the 
country,  known  as  "national  banks."  These  banks  were 
compelled  to  deposit  with  the  Treasury  Department 
United  States  bonds  to  be  held  as  security  for  their  cir- 
culating notes,  thus  providing  a  sound  bank  currency 
and  at  the  same  time  creating  a  market  for  bonds. 

It  was  the  intention  of  those  who  created  the  act  that 
the  oflftce  should  be  kept  out  of  politics.  It  was  created 
for  a  distinct  business  purpose,  having  a  close  relation 
to  the  commercial  and  financial  interests  of  the  country, 
and  the  situation  required  that  the  Comptroller  should 
be  free  from  all  political  bias,  and  that  the  office  should 
remain  outside  the  realm  of  politics.  So  far  as  the  Comp- 
trollers of  the  Currency  have  been  concerned,  they  have, 
as  best  they  could  within  their  power,  kept  the  office  out 
of  pohtics  and  made  it  distinctly  a  business  office. 

In  accordance  with  this  idea,  the  incumbent  of  the 
office  was  to  be  appointed  by  the  President  of  the  United 
States  upon  the  suggestion  of  the  Secretary  of  the  Trea- 
sury, and  to  hold  the  office  for  a  period  of  five  years, 

265 


266  THE  COMPTROLLERS  OFFICE. 

thus  extending  it  beyond  the  incumbency  of  the  presi- 
dential office.  The  Comptroller  could  not  be  removed 
from  office  except  on  charges  filed  by  the  President,  and 
action  taken  thereon  in  the  form  of  impeachment — the 
only  office,  with  possibly  the  exception  of  the  Director  of 
the  Mint,  where  removal  cannot  be  had  on  charges  filed 
with  the  Senate. 

An  Independent  Office. 

There  is  a  nominal  affiliation  between  the  Treasury 
Department  and  the  office  of  the  Comptroller  of  the  Cur- 
rency, but  the  Comptroller's  office,  differing  from  any 
other  connected  with  the  department,  does  not  report  on 
what  goes  on  within  the  Comptroller's  office,  either  to  the 
Treasurer  or  to  the  President ;  nor  does  the  Comptroller 
report  either  to  the  President  or  the  Secretary,  but  he  re- 
ports directly  to  the  Congress  of  the  United  States, 
being  required  to  give  annually  the  conditions  of  the 
banks  as  they  are  on  a  certain  day  prior  to  the  convening 
of  Congress,  together  with  such  recommendations  as 
would,  in  his  opinion,  improve  the  banking  conditions  of 
the  country.  The  salary  of  the  office,  like  that  attaching 
to  most  high  positions  under  the  government,  is  very 
meager,  being  only  $5,000  a  year;  and  yet  there  are  a 
good  many  people  willing  to  accept  the  place. 

The  act  creating  the  national-bank  system  and  the 
office  of  Comptroller  sets  forth  what  shall  be  done  to 
create  a  national  bank.  It  gives  the  number  of  persons 
who  may  take  a  charter  (not  less  than  five) ,  and  fixes  the 
minimum  amount  of  capital  for  such  banks,  that  being 
not  less  than  $50,000  in  cities  of  not  over  6,000  inhabit- 
ants, and  from  $100,000  to  $200,000  in  cities  of  larger 


THE   COMPTROLLER'S  OFFICE.  267 

size.    This  act  has  been  amended  to  permit  the  organiza- 
tion of  banks  with  $25,000  capital,  and  in  other  respects. 

The  Organization  Department. 

The  office  in  its  organization  has  three  or  four  de- 
partments. The  Organization  Department  receives  the 
apphcations  for  the  creation  of  a  national  bank.  The 
application  must  set  forth  the  names  of  those  who  are 
seeking  the  charter,  the  amount  of  capital,  the  popula- 
tion of  the  city,  etc.  When  the  appHcation  is  received, 
the  Comptroller  examines  it  to  ascertain  whether  or  not 
the  persons  applying  should  be  granted  a  charter;  and 
if,  in  his  judgment,  a  charter  should  not  be  given,  it  is 
not  granted.  This  is  not  the  result  of  any  statutory  re- 
quirement, but  a  course  which  the  office  has  assumed  of 
itself  without  any  question  as  to  its  right.  The  great 
powers  of  which  the  incumbent  of  the  office  is  possessed 
are  powers  which  he  has  assumed  rather  than  received  by 
legislative  enactment,  and  their  assumption  and  con- 
tinued possession  come  largely  from  the  fact  that  the 
banking  institutions  over  which  he  presides  realize  the 
importance  of  the  Comptroller's  hands  being  upheld,  if 
the  banks  are  to  be  healthful  and  sound  institutions. 

The  bank,  having  been  granted  a  charter,  is  given  a 
name,  that  which  the  incorporators  select  always  being 
given,  unless  at  that  time  or  prior  the  name  suggested 
has  been  used  by  another  bank.  The  bank,  having  then 
deposited  with  the  Treasurer  of  the  United  States  the 
minimum  amount  of  bonds,  may  now  take  out  circula- 
tion. There  have  been  a  good  many  banks,  especially  in 
the  larger  cities  requiring  a  minimum  amount  of  $50,000 
bonds,  which  have  never  taken  out  any  circulation  what- 


268  THE   COMPTROLLER'S   OFFICE. 

ever.  I  think  there  are  few  banks  that  have  the  maximum 
amount  of  circulation  which  the  law  permits  them.  This 
is  on  the  principle  that  there  is  not  any  profit  in  the  cir- 
culation, and  that  it  is  better  to  leave  the  bonds  without 
taking  out  the  circulation,  paying  the  tax,  and  going 
to  the  general  trouble  of  having  the  circulation  issued. 

National  Bank  Examiners. 

After  the  bank  has  been  established,  it  comes  under 
the  active  supervision  of  the  Comptroller  of  the  Curren- 
cy. Under  the  act  he  is  empowered,  subject  to  the  ap- 
proval of  the  Secretary  of  the  Treasury  (and  in  that 
alone  has  the  Secretary  any  control  over  the  Comptrol- 
ler's office,  exercising  the  same  right  that  the  Senate  of 
the  United  States  does  over  the  appointments  of  the 
President  of  the  United  States),  to  appoint  a  number 
of  men  to  the  office  of  National  Bank  Examiners.  Their 
duties,  under  the  direction  of  the  Comptroller  of  the 
Currency,  are  to  visit  the  banks  in  the  districts  to  which 
they  are  appointed. 

Here  again  comes  into  play  the  power  assumed  on 
the  part  of  the  Comptroller,  for  he  makes  it  the  duty  of 
the  examiner,  not  only  to  see  that  the  capital  stock  is 
intact  but  to  see  further  that  all  the  methods  of  banking 
employed  in  the  bank  are  of  a  character  that  insures  not 
only  safety  to  the  public,  but  benefit  to  the  stockholder. 
As  a  result,  the  examiner  not  only  sees  that  all  the  cash 
is  th^re,  but  he  takes  upon  himself  the  duty  of  seeing 
to  it,  as  far  as  he  can,  that  the  paper  held  by  the  bank  is 
genuine,  that  the  notes  are  of  the  value  that  they  rep- 
resent themselves  to  be,  and  that  many  other  details  are 
properly  administered. 


THE  comptroller's  OFFICE.  269 

Thus  it  happens  that  when  an  inspector  comes  into  a 
bank  and  finds  an  old-fashioned  method  of  bookkeeping 
employed,  he  reports  that  fact ;  he  also  ascertains  the  sal- 
ary of  the  various  officials,  the  amount  of  rent  paid,  and 
all  other  details  which  enter  into  the  conduct  of  a  bank. 
The  same  method  of  examination  is  pursued  whether  in 
the  National  City  of  New  York,  with  a  capital  of  $10,- 
000,000,  or  in  the  smallest  bank  of  medium  capital. 

The  great  strength  of  the  national-bank  system,  the 
great  source  of  its  influence  over  the  banking  system  of 
the  country  since  its  establishment,  has  arisen  from  the 
very  uniformity  of  the  control  exercised  in  the  Comptrol- 
ler's office,  bringing  about  in  the  individual  banks, 
whether  in  Chicago,  New  York  or  elsewhere,  the  same 
method  of  bookkeeping  and  the  same  details  which  are 
necessary  to  the  careful  management  of  a  bank. 

The  Department  of  Reports. 

The  examiner's  report  is  made  to  the  Comptroller  of 
the  Currency,  and  thence  sent  to  the  Department  of  Re- 
ports, where  there  is  a  large  force  of  clerks  to  examine 
these  reports,  see  what  is  defective  in  the  bank,  and  com- 
pare with  the  previous  report.  Upon  the  basis  of  these 
reports  the  Comptroller  of  the  Currency  writes  to  the 
president  or  directors  of  the  bank  suggesting  steps  to  be 
taken  to  strengthen  the  position  of  the  bank. 

The  Redemption  Department. 

There  is  another  division  of  the  Comptroller's  office 
known  as  the  Redemption  Department,  where  mutilated 
and  worn-out  bank  notes  and  the  notes  of  banks  which 
have  gone  into  liquidation  are  redeemed. 


270  THE  COMPTROLLER'S  OFFICE. 

The  Issuing  Department. 
Another  department,  known  as  the  Issuing  Depart- 
ment, issues  to  the  banks  the  amount  of  bank  notes  to 
which  they  are  entitled.  Until  the  Bank  Act  was  amend- 
ed during  the  administration  of  President  McKinley,  the 
amounts  of  circulating  notes  to  be  issued  on  the  deposit 
of  bonds  was  90  per  cent  of  the  par  value  of  the  bonds. 
But  under  the  present  act,  the  total  value  of  the  bonds 
may  be  issued  upon  the  2  per  cent  bonds  which  were  the 
refunding  bonds  of  the  former  administration. 

As  to  whether  a  bond-secured  circulation  is  a  wise  cir- 
culation there  are  a  good  many  suggestions.  Safety 
does  not  enter  into  the  question  so  long  as  the  bonds  of 
the  United  States  continue  good;  which  will  be  as  long 
as  United  States  revenues  are  collected ;  which  will  be  as 
long  as  the  people  are  able  to  pay  internal-revenue  taxes 
or  duties  on  imported  goods. 

It  has  been  suggested  that  the  method  of  issuing  bank- 
note currency  is  not  desirable,  because  it  gives  to  the 
creditor  of  the  bank  who  is  a  note-holder  an  advantage 
over  the  creditor  who  is  simply  a  depositor,  in  making 
the  former  preferred  over  the  latter.  Under  the  existing 
bond  system  the  note-holder  is  a  preferred  creditor,  be- 
cause before  the  bank  gets  started  into  active  operation 
so  many  of  its  assets  are  taken  in  the  shape  of  bonds 
and  deposited  with  the  Treasurer  of  the  United  States 
to  secure  bank  notes,  these  bonds  being  sold  in  case  of 
failure  of  the  bank,  and  the  amount  received  from  the 
sale  being  used  to  pay  the  claim  of  the  preferred  cre- 
ditor, who  holds  the  notes  of  the  bank.  In  case  there 
is  not  a  sufficient  amount  of  money  received  from  the 


THE   COMPTROLLEE'S  OFFICE.  271 

bonds  to  pay  the  notes,  the  act  provides  that  the  note- 
holder shall  have  a  prior  lien  on  the  other  assets  of  the 
bank,  out  of  which  he  shall  be  reimbursed  before  the  pay- 
ment is  made  to  depositors. 

Another  objection  which  has  always  been  found  has 
not  arisen  from  the  idea  that  the  safety  could  be  im- 
proved, but  is  that  with  a  note  circulation  amounting  to 
only  90  per  cent,  or  even  to  par  on  the  deposited  bonds, 
the  premium  on  the  bonds  over  their  par  value  is  al- 
ways tied  up.  When  the  banks  were  allowed  circula- 
tion equal  to  90  per  cent  of  the  par  value  of  the  bonds 
and  the  bond  was  selling  at  100  to  115,  there  was  always 
twenty-five  dollars  locked  up,  not  available  for  loaning 
purposes ;  and  even  at  present  there  is  still  eleven  dollars 
taken  out  of  the  active  channels  of  business  and  permitted 
to  lie  in  Washington,  a  source  of  profit  neither  to  the 
bank  nor  to  Congress. 

So  there  are  some  very  valid  objections  to  the  pro- 
visions for  issuing  notes  by  the  banks,  and  I  take  it  that 
as  we  make  progress  in  the  field  of  finance  we  shall  come 
to  understand  what  is  the  proper  basis  for  a  bank-note 
circulation,  and  we  shall  not  be  surprised  if  the  bank-note 
issue  shrinks  to  nothing,  because  it  is  more  profitable  to 
sell  the  bonds  than  to  hold  them  as  a  basis  for  note  issue. 
When  a  bank-note  currency  is  based  upon  a  security 
which  varies  in  market  value,  no  matter  what  may  be  the 
monetary  needs  of  the  country,  if  there  is  more  profit 
in  selling  the  bonds  than  in  taking  out  notes  thereon,  the 
bonds  will  be  sold. 

Insolvent  Banks. 

If  the  bank  impairs  its  capital,  the  Comptroller  of  the 
Currency  notifies  the  directors  and  calls  upon  them  to 


272  THE  comptrollee's  office. 

make  good  the  deficit.  In  case  they  fail  to  do  so,  the 
Comptroller  declares  the  bank  insolvent  and  places  it  in 
the  hands  of  a  receiver.  In  this  the  Comptroller  is  forti- 
fied by  the  decisions  of  the  Supreme  Court  of  the  United 
States.  His  judgment  must  control.  When  he  de- 
clares that  a  bank  is  insolvent,  there  is  no  power  in  the 
courts  of  the  United  States  to  gainsay  that,  and  he  is 
clothed  with  the  right  to  appoint  a  receiver  to  take  charge 
of  the  assets. 

I  remember  an  instance,  when  I  was  Comptroller,  of  a 
bank  in  Tacoma  which  my  examiner  reported  to  me  as 
having  a  reserve  of  only  6  per  cent  whereas  the  require- 
ment was  15  per  cent,  as  it  is  in  all  but  five  or  six  large 
cities,  known  as  reserve  cities,  where  25  per  cent  is  re- 
quired. I  ordered  the  examiner  to  declare  the  bank  in- 
solvent. The  directors  got  out  an  injunction,  but  the 
judge  declared  that,  while  he  thought  it  was  all  wrong 
for  the  Comptroller  of  the  Currency  to  have  more  power 
than  the  President  and  Congress,  he  could  not  do  any- 
thing but  let  him  take  charge  of  the  bank  if  he  so  desired. 
This  power  vested  in  the  Comptroller  requires  impar- 
tial action  over  all  banks  that  come  under  his  control. 

Responsibility  of  the  Office. 

The  office  differs  from  any  other  in  ^Washington  be- 
cause there  is  absolutely  no  routine.  Every  case  is  an 
individual  case,  and  the  Comptroller  must  exercise  in- 
dividual judgment  in  every  instance.  The  great  re- 
sponsibility that  attaches  to  the  office  is  due  to  the  fact 
that  the  bank  is  the  one  necessity  in  every  conmiunity 
that  affects  every  business  enterprise.  The  failure  of 
the  bank  takes  out  of  the  business  channels  of  the  com- 


THE  COMPTEOLLER^S  OFFICE.  278 

munity  more  or  less  of  the  fundjs,  and  curtails  the  credit 
of  the  community. 

That  was  particularly  so  during  the  panic  of  1898. 
During  the  thirty  years  of  the  existence  of  the  office 
prior  to  my  incumbency  there  had  been  182  failures  of 
national  banks.  During  the  first  two  weeks  I  was  in 
ofidce  there  were  165  failures.  The  result  of  the  failure 
of  so  many  banks  was  seriously  to  embarrass  many  com- 
munities, and  the  effect  was  very  far-reaching.  I  con- 
tinued to  give  a  bank  opportunity  to  do  business  if  I 
found  its  management  sound  and  honest.  It  would  be 
assumed  that  a  bank  having  failed  once,  and  having 
suspicion  attached  to  it,  could  never  succeed  in  obtaining 
the  confidence  of  the  public.  I  tried  the  experiment, 
laying  down  certain  conditions  which  were  to  be  com- 
plied with  on  the  part  of  the  directors  of  the  bank.  Of 
the  165,  I  thus  opened  115,  and  100  of  these  proved  to 
be  very  successful  institutions. 

But  there  were  many  banks  that  did  not  fail,  but  were 
close  to  the  point,  and  the  question  with  the  Comptroller 
was  whether  to  close  them  at  once  or  run  the  risk  of 
their  failure  with  ensuing  disaster  to  the  community. 
I  remember  one  instance  where  I  considered  for  a  long 
time  the  advisability  of  closing  a  prominent  bank  in  the 
Northwest.  The  institution  had  enjoyed  high  credit, 
but,  because  of  investing  in  notes  based  on  land  booms 
in  the  neighborhood,  the  credit  was  seriously  impaired. 
The  examiner  insisted  that  the  bank  should  be  closed,  but 
I  felt  that  I  should  take  the  risk.  However,  I  put  on  it 
an  assessment  of  considerable  size.  Many  of  the  stock- 
holders came  to  see  me,  and  they  fiinally  concluded  to  pay 

I.B.L.  Vol.  4—18 


274  THE  comptroller's  office. 

the  assessment,  and  that  bank  is  now   the  largest    in 
its  state. 

Liquidation  of  Assets. 

As  a  result  of  bad  banking  or  mistaken  banking,  banks 
are  very  likely  to  get  themselves  loaded  up  with  assets 
"  not  easily  reahzable,  and  when  the  pinch  comes  they  fail 
and  go  into  the  hands  of  a  receiver.  The  liquidation  of 
these  assets  is  not  an  easy  problem,  especially  as  the  law 
requires  that  the  receiver  shall  recommend  what  shall  be 
done  with  this  or  that  asset,  that  the  Comptroller  shall 
approve,  and  that  the  district  court  shall  enter  a  decree 
authorizing  the  sale. 

While  it  is  provided  that  the  bank  shall  not  loan  upon 
real  estate,  a  good  many  banks  get  such  security  by 
making  a  loan  and  then  taking  additional  security  in  the 
form  of  a  mortgage.  I  found  in  the  failures  of  banks 
a  good  deal  of  such  paper.  There  are  many  assets  of 
a  strange  character.  At  one  time  I  had  a  full  equipment 
for  an  opera  house.  I  had  in  a  Dakota  town  a  butcher 
shop.  I  had  any  amount  of  live  stock ;  I  had  one  trotting 
horse,  which  sold  for  $10,000.  In  Puget  Sound  a  certain 
bank  had  as  part  of  its  assets  enough  cans  to  can  a  large 
portion  of  the  salmon  caught  in  Columbia  river.  And 
there  is  hardly  a  thing  you  could  name,  from  an  article  of 
^  wearing  apparel  to  a  large  manufactory,  that  at  some 
time  or  other  does  not  in  this  way  get  into  the  hands  of 
the  Comptroller. 


CHAPTER  XIV. 

MONETARY  SYSTEM  OF  THE  U.  S. 
No.  1 — Grold  and  Silver  Coinage. 

In  1786  the  Congress  of  the  Confederation  chose  as 
the  monetary  unit  of  the  United  States  the  dollar  of 
375.64  grains  of  pure  silver.  This  unit  had  its  origin 
in  the  Spanish  piaster  or  milled  dollar,  which  constituted 
the  basis  of  the  metallic  circulation  of  the  English  colon- 
ies in  America.  It  was  never  coined,  there  being  at  that 
time  no  mint  in  the  United  States. 

The  act  of  April  2, 1792,  established  the  first  monetary 
system  of  the  United  States.  The  bases  of  the  system 
were:  The  gold  dollar  or  unit,  containing  24.75  grains  of 
pure  gold,  and  stamped  in  pieces  of  $10,  $5,  and  $2%, 
denominated  respectively  eagles,  half  eagles,  and  quarter 
eagles;  the  silver  dollar  or  unit,  containing  371.25  grains 
of  pure  silver.  A  mint  was  established.  The  coinage 
was  unlimited,  and  there  was  no  mint  charge.  The  ratio 
of  gold  to  silver  in  coinage  was  1  to  15.  Both  gold  and 
silver  were  legal  tender.     The  standard  was  double. 

The  act  of  1792  undervalued  gold,  which  was  there- 
fore exported.  The  act  of  June  28,  1834,  was  passed 
to  remedy  this,  by  changing  the  mint  ratio  between  the 
metals  to  1  to  16.002.  This  latter  act  fixed  the  weight  of 
the  gold  dollar  at  25.8  grains,  but  lowered  the  fineness 
from  0.916  2/3  to  0.899225.  The  fine  weight  of  the 
gold  dollar  was  thus  reduced  to  23.2  grains.  The  act 
of  1834  undervalued  silver,  as  that  of  1792  had  under- 

275 


276  MONETARY  SYSTEM  OF  THE  U.  S. 

valued  gold,  and  silver  was  attracted  to  Europe  by  the 
more  favorable  ratio  of  1  to  15  %.  The  act  of  January 
18, 1837,  was  passed  to  make  the  fineness  of  the  gold  and 
silver  coins  uniform.  The  legal  weight  of  the  gold 
dollar  was  fixed  at  25.8  grains  and  its  fine  weight  at  23.22 
grains.  The  fineness  was  therefore  changed  by  this  act 
to  0.900  and  the  ratio  to  1  to  15.988  +. 

Silver  continued  to  be  exported.  The  act  of  February 
21, 1853,  reduced  the  weight  of  the  silver  coins  of  denom- 
ination less  than  $1,  which  the  acts  of  1792  and  1837  had 
made  exactly  proportional  to  the  weight  of  the  silver 
dollar,  and  provided  that  they  should  be  legal  tender 
to  the  amount  of  only  $5.  Under  the  acts  of  1792  and 
1837  they  had  been  full  legal  tender.  By  the  act  of 
1853  the  legal  weight  of  the  half  dollar  was  reduced  to 
192  grains  and  that  of  the  other  fractions  of  a  dollar  in 
proportion.  The  coinage  of  the  fractional  parts  of  the 
dollar  was  reserved  to  the  Government. 

Provisions  of  the  Act  of  1873. 

The  act  of  February  12,  1873,  provided  that  the  unit 
of  value  of  the  United  States  should  be  the  gold  dollar 
of  the  standard  weight  of  25.8  grains,  and  that  there 
should  be  coined,  besides,  the  following  gold  coins:  A 
quarter  eagle,  or  2%  dollar  piece;  a  three-dollar  piece; 
a  half -eagle,  or  5-dollar  piece;  an  eagle,  or  lO-doUar 
piece,  and  a  double  eagle,  or  20-dollar  piece,  all  of  a 
standard  weight  proportional  to  that  of  the  dollar  piece. 
These  coins  were  made  legal  tender  in  all  payments  at 
their  nominal  value  when  not  below  the  standard  weight 
and  limit  of  tolerance  provided  in  the  act  for  the  single 


MONETARY  SYSTEM  OF  THE  U.  S.  277 

piece,  and  when  reduced  in  weight  they  should  be  legal 
tender  at  a  valuation  in  proportion  to  their  actual  weight. 
The  silver  coins  provided  for  by  the  act  were  a  trade 
dollar;  a  half  dollar,  or  50-cent  piece;  a  quarter  dollar, 
and  a  10-cent  piece;  the  weight  of  the  trade  dollar  to 
be  420  grains  troy;  the  half  dollar,  12l/^  grams;  the 
quarter  dollar  and  the  dime,  respectively,  one-half  and 
one-fifth  of  the  weight  of  the  half  dollar.  These  silver 
coins  V  ere  made  legal  tender  at  their  nominal  value 
for  any  amount  not  exceeding  $5  in  any  one  payment. 
The  charge  for  converting  standard  gold  bullion  into 
coin  was  fixed  at  one-fifth  of  1  per  cent.  Owners  of 
silver  bullion  were  allowed  to  deposit  it  at  any  mint  of 
the  United  States,  to  be  formed  into  bars  or  into  trade 
dollars,  and  no  deposit  of  silver  for  other  coinage  was  to 
be  received. 

Section  2  of  the  joint  resolution  of  Congress  of  July 
22,  1876,  recited  that  the  trade  dollar  should  not  there- 
after be  legal  tender,  and  that  the  Secretary  of  the 
Treasury  should  be  authorized  to  hmit  the  coinage  of  the 
same  to  an  amount  sufficient  to  meet  the  export  demand 
for  it.  The  act  of  February  19,  1887,  retired  the  trade 
dollar  and  prohibited  its  coinage.  That  of  September  26, 
1890,  discontinued  the  coinage  of  the  1 -dollar  and  3-dol- 
lar  gold  pieces. 

The  Silver  Act  of  1878. 

The  act  of  February  28,  1878,  directed  the  coinage  of 
silver  dollars  of  the  weight  of  412%  grains  troy,  of 
standard  silver  as  provided  in  the  act  of  January  18, 
1837,  and  that  such  coins,  with  all  standard  silver  dollars 


278  MONETARY  SYSTEM  OF  THE  U.  S. 

theretofore  coined,  should  be  legal  tender  at  their  nom- 
inal value  for  all  debts  and  dues,  public  and  private,  ex- 
cept where  otherwise  expressly  stipulated  in  the  contract. 

The  Secretary  of  the  Treasury  was  authorized  and 
directed  by  the  first  section  of  the  act  to  purchase  from 
time  to  time  silver  bullion  at  the  market  price  thereof, 
not  less  than  $2,000,000  worth  nor  more  than  $4,000,000 
worth  per  month,  and  to  cause  the  same  to  be  coined 
monthly,  as  fast  as  purchased,  into  such  dollars.  A  sub- 
sequent act,  that  of  July  14,  1890,  directed  that  the  Sec- 
retary of  the  Treasury  should  purchase  silver  bulUon  to 
the  aggregate  amount  of  4,500,000  ounces,  or  so  much 
thereof  as  might  be  offered,  each  month,  at  the  market 
price  thereof,  not  exceeding  $1  for  371.25  grains  of 
pure  silver,  and  to  issue  in  payment  thereof  Treasury 
notes  of  the  United  States,  such  notes  to  be  redeemable 
by  the  Government,  on  demand,  in  coin,  and  to  be  legal 
tender  in  payment  of  all  debts,  public  and  private,  ex- 
cept where  otherwise  expressly  stipulated  in  the  contract. 
The  act  directed  the  Secretary  of  the  Treasury  to  coin 
each  month  2,000,000  ounces  of  the  silver  bullion  pur- 
chased under  the  provisions  of  the  act  into  standard  silver 
dollars  until  the  1st  day  of  July,  1891,  and  thereafter  as 
much  as  might  be  necessary  to  provide  for  the  redemp- 
tion of  the  Treasury  notes  issued  under  the  act.  The 
purchasing  clause  of  the  act  of  July  14,  1890,  was  re- 
pealed by  the  act  of  November  1,  1893. 

The  Standard  of  Value. 

In  providing  for  the  coinage  of  the  precious  metals 
Congress  estabhshed,  by  the  act  of  April  2,  1792,  the 


MONETARY  SYSTEM  OF  THE  U.  S.  279 

standard  of  value,  consisting  of  certain  gold  and  silver 
coins,  at  a  ratio  of  15  to  1 — that  is  to  say,  the  value  of 
an  ounce  of  fine  gold  was  in  effect  declared  to  be  equal 
to  the  value  of  fifteen  ounces  of  fine  silver. 

A  list  of  the  coins  authorized  by  the  acts  of  April  2, 
1792,  with  the  weights  and  fineness,  will  be  found  below. 
Both  gold  and  silver  coins  were  declared  to  be  standards. 

The  ratio  of  15  to  1  was  adopted  in  pursuance  of  in- 
vestigations conducted  by  Alexander  Hamilton,  Secre- 
tary of  the  Treasury,  who,  in  his  report  upon  the  subject, 
said  that  15  to  1  was  a  near  approximation  to  the  com- 
mercial value  of  the  two  metals.  It  was  soon  discovered, 
however,  that  gold  at  the  ratio  of  15  to  1  was  under- 
valued, and  silver  became  practically  the  only  metallic 
money  available  for  use  in  the  United  States.  In  1834 
the  ratio  was  changed  to  16.002  to  1,  and  in  1837  it  was 
changed  to  15.988  to  1.  That  is  the  present  ratio  and  is 
commonly  called  16  to  1.  By  this  change  silver  was 
undervalued  and  gold  came  into  use  in  its  place. 

By  the  act  of  February  12,  1873,  the  coinage  of  the 
standard  silver  dollar  was  discontinued,  and  the  gold  dol- 
lar of  25.8  grains  of  standard  gold,  .900  fine,  was  de- 
clared to  be  the  unit  of  value.  The  subsequent  restora- 
tion of  the  coinage  of  silver  dollars  under  the  act  of  Feb- 
ruary 28,  1878,  was  on  Government  account,  and  did 
not  restore  the  silver  dollar  to  its  former  place  as  a 
standard  of  value. 

But  while  Congress  provided  for  the  so-called  double 
or  bimetallic  standard,  such  double  standard  has  never 
been  effective  in  the  United  States.  From  1792  to  1834 
silver  was  the  metal  by  which  all  values  were  measured. 


280  MONETARY  SYSTEM  OF  THE  U.  S. 

and  since  1834  gold  has  been  and  still  is  the  sole  actual 
standard. 

Coins  and  Paper  Currency. 

There  are  ten  different  kinds  of  money  in  circulation 
in  the  United  States,  namely,  gold  coins,  standard  silver 
dollars,  subsidiary  silver,  gold  certificates,  silver  certifi- 
cates. Treasury  notes  issued  under  the  act  of  July  14, 
1890,  United  States  notes  (also  called  greenbacks  and 
legal  tenders),  national-bank  notes  and  nickel  and 
bronze  coins.  These  forms  of  money  are  all  available 
as  circulation.  While  they  do  not  all  possess  the  full 
legal-tender  quality,  each  kind  has  such  attributes  as  to 
give  it  currency.     The  status  of  each  kind  is  as  follows : 

Gold  coin  is  legal  tender  at  its  nominal  or  face  value 
for  all  debts,  public  and  private,  when  not  below  the 
standard  weight  and  limit  of  tolerance  prescribed  by  law ; 
and  when  below  such  standard  and  limit  of  tolerance  it 
is  legal  tender  in  proportion  to  its  weight. 

Standard  silver  dollars  are  legal  tender  at  their  nom- 
inal or  face  value  in  payment  of  all  debts^  public  and 
private,  without  regard  to  the  amount,  except  where 
otherwise  expressly  stipulated  in  the  contract. 

Subsidiary  silver  is  legal  tender  for  amounts  not  ex- 
ceeding $10  in  any  one  payment. 

Treasury  notes  of  the  act  of  July  14,  1890,  are  legal 
tender  for  all  debts,  public  and  private,  except  where 
otherwise  expressly  stipulated  in  the  contract. 

United  States  notes  are  legal  tender  for  all  debts, 
public  and  private,  except  duties  on  imports  and  interest 
on  the  public  debt. 


MONETAKY  SYSTEM  OF  THE  U.  S.  281 

[United  States  notes,  upon  resumption  of  specie  pay- 
ments, January  1,  1879,  became  acceptable  in  payment 
of  duties  on  imports  and  have  been  freely  received  on 
that  account  since  the  above  date,  but  the  law  has  not 
been  changed.] 

Gold  certificates,  silver  certificates,  and  national  bank 
notes  are  not  legal  tender,  but  both  classes  of  certificates 
are  receivable  for  all  public  dues,  while  national-bank 
notes  are  receivable  for  all  pubhc  dues  except  duties  on 
imports,  and  may  be  paid  out  by  the  Government  for  all 
salaries  and  other  debts  and  demands  owing  by  the 
United  States  to  individuals,  corporations,  and  associa- 
tions within  the  United  States,  except  interest  on  the 
public  debt  and  in  redemption  of  the  national  currency. 
All  national  banks  are  required  by  law  to  receive  the 
notes  of  other  national  banks  at  par. 

The  minor  coins  of  nickel  and  copper  are  legal  tender 
to  the  extent  of  25  cents. 

Gold  Coins. 

The  coinage  of  legal-tender  gold  was  authorized  by  the 
first  coinage  act  passed  by  Congress,  April  2, 1792. 

The  gold  unit  of  value  is  the  dollar,  which  contains 
25.8  grains  of  standard  gold  .900  fine.  The  amount  of 
fine  gold  in  the  dollar  is  23.22  grains,  and  the  remainder 
of  the  weight  is  an  alloy  of  copper.  While  the  gold 
dollar  is  the  unit  and  standard  of  value,  the  actual  coin- 
age of  the  $1  piece  was  discontinued  under  authority  of 
the  act  of  September  26,  1890.  Gold  is  now  coined  in 
denominations  of  $2.50,  $5,  $10,  and  $20,  called  respec- 


282  MONETARY  SYSTEM  OF  THE  U.  S. 

tively,  quarter  eagles,  half  eagles,  eagles,  and  double 
eagles. 

The  total  coinage  of  gold  by  the  mints  of  the  United 
States  from  1792  to  June  30,  1908,  was  $2,993,448,703, 
of  which  it  was  estimated  that  $1,535,401,287  was  in 
existence  July  1,  1908,  as  coin  in  the  United  States, 
while  the  remainder,  $1,458,047,416,  represented  the  ex- 
cess of  exports  over  imports  and  the  amount  consumed 
in  the  arts.  The  gold  bullion  in  the  United  States  July 
1,  1908,  was  about  $80,800,000. 

The  basis  for  the  estimate  of  the  amount  of  gold  coin 
in  the  United  States  was  established  in  1873,  when  the 
amount  in  the  vaults  of  the  national  banks  and  in  the 
Treasury  was  ascertained  from  reports  to  be  $71,188,- 
548.  To  this  was  added  $20,000,000  as  an  estimate  of 
the  amount  of  gold  in  use  on  the  Pacific  coast,  $10,000,- 
000  as  the  amount  held  by  all  other  banks  and  by  the 
people  and  $3,818,086  in  national  banks.  The  amount 
thus  ascertained  was  $105,006,634,  to  which  have  been 
added  each  year  the  new  coinage  reported  by  the  Di- 
rector of  the  Mint  and  the  imports  as  shown  by  the  cus- 
tom house  reports,  and  from  which  have  been  deducted 
the  exports  and  the  amounts  consumed  in  the  arts.  It 
will  be  seen  that  more  than  one-half  of  the  gold  coins 
struck  at  the  mints  of  the  United  States  have  disap- 
peared from  circulation. 

[The  Director  of  the  Mint  in  1908  revised  the  esti- 
mates of  the  amount  of  gold  in  the  United  States,  and 
as  a  result  of  the  revision  the  amount  was  reduced  by 
$135,000,000.] 


MONETARY  SYSTEM  OE  THE  U.  S.  283 

Silver  Coins. 

The  principal  silver  coin  is  the  dollar,  which  contains 
4121/2  grains  of  standard  silver  .900  fine.  The  amount 
of  fine  silver  in  the  dollar  is  871%  grains,  and  there  are 
41%  grains  of  copper  alloy.  The  standard  silver  dol- 
lar was  first  authorized  by  the  act  of  April  2,  1792.  Its 
weight  was  416  grains  .8924  fine.  It  contained  the 
same  quantity  of  fine  silver  as  the  present  dollar,  \^  hose 
weight  and  fineness  were  established  by  the  act  of  Janu- 
ary 18,  1837.  The  coinage  of  the  standard  silver  dollar 
was  discontinued  by  the  act  of  February  12,  1873,  and 
it  was  restored  by  the  act  of  February  28,  1878.  The 
total  amount  coined  from  1792  to  1873  was  $8,031,238, 
and  the  amount  coined  from  1878  to  December  31,  1904, 
when  the  coinage  was  discontinued,  was  $570,272,610. 
The  coinage  ratio  between  gold  and  silver  under  the  act 
of  1792  was  15  to  1,  but  by  the  acts  of  1834  and  1837  it 
was  changed  first  to  16.002  to  1  and  finally  to  15.988  to  1 
(commonly  called  16  to  1).     This  is  the  present  ratio. 

Of  the  570,272,610  standard  silver  dollars  coined  since 
February  1878,  2,495,000  are  reported  to  have  been 
shipped  to  Cuba,  Porto  Rico,  and  the  Philippines,  of 
which  612,730  have  been  returned;  there  were  held  in 
the  Treasury  June  30,  1908,  $491,895,049,  and  the 
amount  outside  the  Treasury  in  the  United  States  was 
$76,354,933.  Of  the  amount  held  in  the  Treasury  $474,- 
850,000  were  held  for  the  redemption  of  an  equal  amount 
of  silver  certificates  outstanding;  $4,982,000  were  held 
on  account  of  Treasury  notes  of  1890,  and  $12,563,049 
were  held  in  the  general  cash  as  assets  of  the  Govern- 
ment.    The  commercial  value  of  an  ounce  of  fine  silver 


284  MONETARY  SYSTEM  OF  THE  U.  S. 

June  80,  1908,  was  $0.54282,  and  the  commercial  value 
of  the  silver  in  the  silver  dollar  on  that  date  was  41.983 
cents. 

Subsidiary  Silver. 

The  silver  coins  of  smaller  denominations  than  one 
dollar,  authorized  by  the  act  of  April  2,  1792,  were  half 
dollars,  quarter  dollars,  dimes,  and  half  dimes.  They 
were  the  equivalent  in  value  of  the  fractional  parts  of  a 
dollar  which  they  represented — that  is,  two  half  dollars 
were  equal  in  weight  to  one  silver  dollar,  and  so  on. 
These  coins  were  full  legal  tender  when  of  standard 
weight,  and  those  of  less  than  full  weight  were  legal 
tender  at  values  proportional  to  their  respective  weights. 

By  the  act  of  February  21,  1853,  the  weight  of  the 
fractional  silver  coins  was  reduced  so  that  the  half  dollar 
weighed  only  192  grains,  and  all  the  smaller  denomina- 
tions were  reduced  in  proportion.  Their  legal-tender 
quality  was  at  the  same  time  limited  to  $5,  and  they  thus 
became  subsidiary  coins.  The  present  subsidiary  coins 
are  half  dollars,  quarter  dollars,  and  dimes.  Their 
weight  is  slightly  different  from  that  prescribed  by  the 
act  of  1853;  but  the  limit  of  their  legal-tender  quality 
has  been  raised  to  $10,  and  $197,912,578  have  been 
coined  since  1873. 

The  amount  of  full-weight  fractional  silver  coined 
prior  to  1853  was  $76,734,964.50,  and  the  amount  of 
subsidiary  silver  coined  since  that  year  is  $256,959,974.20. 

There  was  a  period,  from  1862  to  1876,  when  there 
was  no  fractional  silver  coin  in  circulation  in  the  United 
States  except  on  the  Pacific  coast.     During  this  period 


moneTaky  system  of  the  u.  s.  2^5 

the  small  change  of  the  country  consisted  of  fractional 
paper  currency,  which  is  described  below. 

Issue  of  Standard  Silver  Dollars  and  Subsidiary  Silver. 
Standard  silver  dollars  are  issued  by  the  Treasurer  and 
assistant  treasurers  in  redemption  of  silver  certificates 
and  Treasury  notes  of  1890,  and  are  sent  by  express, 
at  the  expense  of  the  Government,  in  sums  or  multi- 
ples of  $500,  for  silver  certificates  or  Treasury  notes 
of  1890  deposited  with  the  Treasurer  or  any  assistant 
treasurer. 

Upon  the  deposit  of  an  equivalent  sum  in  United 
States  currency  or  national-bank  notes  with  the  Treas- 
urer or  any  assistant  treasurer  or  national-bank  deposi- 
tary, subsidiary  silver  coin  will  be  paid  in  any  amount  by 
the  Treasurer  or  assistant  treasurers  in  the  cities  where 
their  several  offices  are,  or  will  be  sent  by  express,  in 
sums  of  $200  or  more,  at  the  expense  of  the  Government, 
or  by  registered  mail,  at  the  risk  of  the  consignee,  in 
packages  of  $50,  registration  free,  from  the  most  con- 
venient Treasury  office,  to  the  order  of  the  depositor. 
For  this  purpose  drafts  may  be  sent  to  the  Treasurer  or 
the  assistant  treasurer  in  Xew  York,  payable  in  their 
respective  cities  to  the  order  of  the  officer  to  whom  sent. 

The  Silver  Act  of  1890. 

AN  ACT  Directing  the  purchase  of  silver  bullion  and  the  issue  of 

Treasury  notes  thereon,  and  for  other  purposes. 

[Public— No.  214.     1890.] 

Be  it  enacted  hy  the  Senate  and  House  of  Representatives  of 
the  United  States  of  America  in  Congress  assembled.  That  the 
Secretary  of  the  Treasury  is  hereby  directed  to  purchase,  from 
time  to  time,  silver  bullion  to  the  aggregate  amount  of  four  mil- 


^66  MONETARY  SYSTEM  OF  THE  U.  S. 

lion,  five  hundred  tliousand  ounces,  or  so  much  thereof  as  may  be 
offered  in  each  month,  at  the  market  price  thereof,  not  exceeding 
one  dollar  for  three  hundred  and  seventy-one  and  twenty-five  hun- 
dredths grains  of  pure  silver,  and  to  issue  in  payment  for  such 
purchases  of  silver  bullion  Treasury  notes  of  the  United  States 
to  be  prepared  by  the  Secretary  of  the  Treasury,  in  such  form 
and  of  such  denominations,  not  less  than  one  dollar  nor  more  than 
one  thousand  dollars,  as  he  may  prescribe;  and  a  sum  sufficient 
to  carry  into  eff^ect  the  provisions  of  this  act  is  hereby  appropri- 
ated, out  of  any  money  in  the  Treasury  not  otherwise  appro- 
priated. 

Sec.  2.  That  the  Treasury  notes  issued  in  accordance  with 
the  provisions  of  this  act  shall  be  redeemable  on  demand,  in  coin, 
at  the  Treasury  of  the  United  States,  or  at  the  office  of  any  as- 
sistant treasurer  of  the  United  States,  and  when  so  redeemed  may 
be  reissued,  but  no  greater  or  less  amount  of  such  notes  shall  be 
outstanding  at  any  time  than  the  cost  of  the  silver  bullion  and 
the  standard  silver  dollars  coined  therefrom,  then  held  in  the 
Treasury  purchased  by  such  notes ;  and  such  Treasury  notes  shall 
be  a  legal  tender  in  payment  of  all  debts,  public  and  private,  ex- 
cept where  otherwise  expressly  stipulated  in  the  contract,  and 
shall  be  receivable  for  customs,  taxes,  and  all  public  dues,  and 
when  so  received  may  be  reissued;  and  such  notes,  when  held  by 
any  national  banking  association,  may  be  counted  as  a  part  of  its 
lawful  reserve.  That  upon  demand  of  the  holder  of  any  of  the 
Treasury  notes  herein  provided  for  the  Secretary  of  the  Treasury 
shall,  under  such  regulations  as  he  may  prescribe,  redeem  such 
notes  in  gold  or  silver  coin,  at  his  discretion,  it  being  the  estab- 
lished policy  of  the  United  States  to  maintain  the  two  metals  on  a 
parity  with  each  other  upon  the  present  legal  ratio,  or  such  ratio 
as  may  be  provided  by  law. 

Sec.  3.  That  the  Secretary  of  the  Treasury  shall  each  month 
coin  two  million  ounces  of  the  silver  bullion  purchased  under  the 
provisions  of  this  act  into  standard  silver  dollars  until  the  first 
day  of  July,  eighteen  hundred  and  ninety-one,  and  after  that 
time  he  shall  coin  of  the  silver  bullion  purchased  under  the  pro- 
visions of  this  act  as  much  as  may  be  necessary  to  provide  for  the 
redemption  of  the  Treasury  notes  herein  provided  for,  and  any 
gain  or  seigniorage  arising  from  such  coinage  shall  be  accounted 

for  and  paid  into  the  Treasury. 

«  «  «  • 


MONETARY  SYSTEM  OF  THE  U.  S.  287 

Meaning  of  16  to  1. 

The  phrase  "16  to  1,"  as  applied  to  coinage,  means  that 
the  mint  value  of  16  ounces  of  silver  shall  be  equal  to 
the  mint  value  of  1  ounce  of  gold,  that  is,  that  16  ounces 
of  silver  shall  be  coinable  into  as  many  standard  silver 
dollars  as  one  ounce  of  gold  is  coinable  into  standard 
gold  dollars. 

Standard  Bullion. 

Standard  bullion  contains  900  parts  of  pure  gold  or 
pure  silver  and  100  parts  of  copper  alloy. 

The  coining  value  of  an  ounce  of  pure  gold  is  $20.- 
67183  and  the  coining  value  of  an  ounce  of  standard 
gold  is  $18.60465. 

The  coining  value  in  standard  silver  dollars  of  an 
ounce  of  pure  silver  is  $1.2929  and  the  coining  value  of 
an  ounce  of  standard  silver  is  $1.1636. 

What  Is  Seigniorage? 
The  term  seigniorage,  as  used  in  the  United  States, 
means  the  profit  arising  from  the  coinage  of  bullion. 
The  Government  does  not  purchase  gold  bullion,  but 
coins  it  on  private  account.  There  is  no  profit  from  the 
coinage  of  gold  bullion,  the  face  value  of  gold  coins 
being  the  same  as  their  bullion  value,  but  at  the  present 
ratio  of  16  to  1  the  face  value  of  the  silver  dollar  is 
greater  than  its  bullion  value;  therefore  when  silver 
bullion  is  purchased  and  coined  into  dollars  there  is  a 
profit  arising  from  such  coinage,  the  amount  of  which 
depends  upon  the  price  paid  for  the  bullion.  For  ex- 
ample, there  are  371^/4  grains  of  pure  silver  in  a  dollar 
and  there  are  480  grains  of  pure  silver  in  a  fine  ounce. 
The  coinage  value  of  a  fine  ounce  is,  therefore,  $.2929. 


288  MONETARY  SYSTEM  OF  THE  U.  S. 

If  the  fine  ounce  can  be  purchased  for  70  cents,  the  profit 
of  its  coinage  (the  seigniorage)  is  $0.5929 — ,  and  the 
profit  on  the  371^/4  grains  of  pure  silver  in  the  single 
dollar  is  $0.4586 — ,  which  is  the  difference  between  the 
actual  cost  of  the  bullion  in  the  dollar  and  the  nominal 
value  of  the  coin. 

The  silver  purchased  by  the  Government  is  carried 
on  the  books  of  the  Treasury  at  its  actual  cost,  and  the 
seigniorage  is  declared  on  the  coinage  of  each  month 
and  paid  into  the  Treasury. 

Coinage  of  Gold. 

In  the  United  States  there  is  free  and  unlimited  coin- 
age of  gold,  that  is,  standard  gold  bullion  may  be  de- 
posited at  the  mints  in  any  amount,  to  be  coined  for  the 
benefit  of  the  depositor,  without  charge  for  coinage ;  but 
when  other  than  standard  bullion  is  received  for  coinage 
a  charge  is  made  for  parting,  or  for  refining,  or  for 
copper  alloy,  as  the  case  may  be.  Refining  is  the  elim- 
ination from  the  bullion  of  all  base  metals.  Parting  is 
the  separation  of  liny  silver  which  may  be  contamed  in 
the  bullion.  The  charges  for  these  operations  vary  ac- 
cording to  the  actual  expenses.  When  copper  is  added 
for  alloy,  a  charge  of  2  cents  per  ounce  is  made  for  the 
amount  actually  added.  The,  depositor  receives  in  gold 
coin  the  full  value  of  the  gold  in  his  bullion,  less  such 
charges  as  are  indicated  above. 

The  mints  may  lawfully  refuse  to  receive  gold  bullion 
of  less  value  than  $100,  or  when  it  is  too  base  for  coinage ; 
but  in  practice  deposits  of  gold  bullion  are  accepted  with- 
out regard  to  amounts,  and  rejected  only  when  too  base 
for  coinage. 


MONETARY  SYSTEM  OF  THE  U.  S.  289 

Coinage  of  Silver. 

Under  existing  law  in  the  United  States  subsidiary- 
silver  is  coined  only  on  Government  account.  This  coin- 
age is  made  from  bullion  purchased  by  the  Government 
under  the  provisions  of  section  3526,  Revised  Statutes, 
and  the  profits  on  such  coinage  belong  to  the  Govern- 
ment. There  is  at  present  (1909)  no  authority  for  the 
purchase  of  silver  bullion  for  the  coinage  of  standard 
silver  dollars. 

The  total  amount  of  silver  bullion  purchased  under 
the  act  of  July  14, 1890,  from  August  13,  1890,  the  date 
the  act  went  into  effect,  to  November  1,  1893,  the  date 
of  the  repeal  of  the  purchasing  clause  of  that  act,  was 
168,674,682.53  fine  ounces  of  silver  costing  $155,931,- 
002.25. 

There  were  coined  from  the  bullion  purchased  under 
the  act  of  July  14, 1890, 187,027,345  standard  silver  dol- 
lars, of  which  $134,285,166  represent  the  cost  of  the  bul- 
lion coined,  and  which  were  held  in  the  Treasury  for 
the  redemption  of  Treasury  notes  of  1890,  while  the  re- 
mainder, $52,742,179,  constitutes  the  gain  or  seignior- 
age, and  being  the  property  of  the  United  States,  has 
been  paid  into  the  Treasury  of  the  United  States  to  be 
used  as  other  available  funds. 

Under  the  acts  of  March  14, 1900,  and  March  2, 1903, 
there  were  coined  to  July  1, 1905,  from  the  silver  bullion 
purchased  under  the  act  of  July  14, 1890,  $33,118,576  in 
subsidiary  silver  coin  of  which  $21,583,300  represent  the 
cost  of  the  bullion  contained  in  such  coinage  and  for 
which  an  equal  amount  of  Treasury  notes  of  1890  were 
retired,  and  the  balance,  $11,535,276  seigniorage  paid 
into  the  Treasury. 

I.B.Iv.  Vol.  4—19 


290  MONETARY  SYSTEM  OF  THE  U.  S. 

The  seigniorage  is  an  addition  to  the  volume  of  money 
in  the  country,  while  the  silver  coin  representing  the 
cost  of  the  bullion  is  not,  since  it  is  paid  out  only  in  re- 
demption of  the  Treasury  notes  of  1890,  whereupon 
the  latter  are  canceled  and  retired,  as  prescribed  by  the 
acts  of  July  14,  1890,  and  March  14,  1900. 

The  total  expenditure  by  the  United  States  for  silver 
bulhon  exclusive  of  subsidiary  silver  coinage,  is : 

Under  act  of  February  28,  1878 $308,297,260.71 

Under  act  of  July  14,  1890 155,931,002.00 

Total $464,210,262.71 

There  have  been  coined  from  the  bullion  thus  pur- 
chased standard  silver  dollars  of  the  face  value  of  $570,- 
272,610,  and  subsidiary  silver  coin  of  the  face  value  of 
$33,118,576,  consuming  the  entire  amount  of  bullion 
purchased  under  the  act  of  July  14,  1890. 

The  bullion  value  July  1,  1908  of  the  standard  silver 
dollars  coined  was  $238,843,936. 

The  space  required  for  the  storage  of  1,000,000  stand- 
ard silver  dollars  is  250  cubic  feet.  The  standard  silver 
dollars  in  the  vaults  of  the  Treasury  and  the  several 
subtreasuries,  June  30,  1904,  amounting  to  about  462,- 
000,000,  required  115,500  cubic  feet  of  space. 

Trade  Dollars. 
The  trade  dollar  of  420  grains  troy  was  authorized  by 
the  act  of  February  12,  1873.  It  was  intended  for  cir- 
culation in  oriental  countries  as  a  substitute  for  the  Mexi- 
can dollar,  which  it  slightly  exceeded  in  weight;  but  by 
the  terms  of  the  authorizing  act  it  was  made  legal  tender 
in  the  United  States  in  sums  not  exceeding  $5. 


MONETAEY  SYSTEM  OF  THE  U.  S.  291 

This  legal  tender  quality  was  withdrawn  by  the  joint 
resolution  approved  July  22,  1876,  and  the  coinage  was 
limited  to  such  amount  as  the  Secretary  of  the  Treasury 
should  consider  sufficient  to  meet  the  export  demand. 
The  act  of  February  19,  1887,  provided  for  the  retire- 
ment of  trade  dollars  and  their  recoinage  into  standard 
silver  dollars  or  subsidiary  silver.  For  six  months  after 
the  passage  of  the  act  they  could  be  exchanged  at  the 
Treasury  or  any  sub-treasury,  dollar  for  dollar,  for 
standard  silver  dollars  or  subsidiary  coin. 

The  total  number  of  trade  dollars  coined  was  35,965,- 
924.  The  number  redeemed  under  the  act  of  1887  was 
7,689,036,  and  from  the  bullion  resulting  from  the  melt- 
ing of  these  dollars  there  were  coined  in  subsidiary  silver 
$2,668,674.30,  and  into  standard  silver  dollars  $5,078,- 
472.  Since  the  expiration  of  the  period  of  redemption 
above  mentioned,  trade  dollars  have  been  purchased  as 
bullion  when  presented  at  the  mints. 

Free  and  Unlimited  Coinage  of  Silver. 

This  term,  as  used  at  present  in  the  discussion  of  the 
coinage  question,  means  the  right  of  any  person  to  de- 
posit standard  silver  bullion  in  any  amount  at  the  mints 
of  the  United  States  and  have  it  coined  at  the  expense  of 
the  Government,  such  depositor  to  receive  for  his  bullion 
silver  coins  containing  in  the  aggregate  the  same  weight 
of  fine  silver  as  brought  to  the  mint. 

Any  coinage  under  a  future  law  would  depend  upon 
the  terms  of  that  law.     (See  "Coinage  of  Gold.") 

Unlimited  Coinage. 
Coinage  may  be  unlimited  without  being  entirely  free. 
It  would  be  unlimited  if  any  owner  of  bullion  had  the 


292  MONETARY  SYSTEM  OF  THE  U.  S. 

right  to  deposit  it  at  the  mint  and  have  it  converted  into 
coins  without  any  restrictions  as  to  the  amount. 

World's  Stock  of  Gold  and  Silver  Coin  in  1873  and  1906. 

The  stock  of  gold  and  silver  in  the  world  in  1873  and 
1906  is  estimated  to  have  been  as  f  oUows : 

1873  1906 

Gold    ......  .$3,045,000,000         $6,888,900,000 

Silver 1,817,000,000  3,260,200,000 

Sales  of  Gold. 

Duf-ing  the  period  of  the  suspension  of  specie  pay- 
ments in  the  United  States — January  1,  1862,  to  Janu- 
ary 1,  1879 — the  customs  revenues  of  the  Government 
were  collected  in  gold.  A  sufficient  amount  of  this  gold 
was  reserved  to  meet  that  portion  of  the  interest  on  the 
public  debt  which  was  payable  in  coin,  and  the  remain- 
der was  sold  from  time  to  time  for  currency  at  the  mar- 
ket price  by  the  several  assistant  treasurers  of  the  United 
States,  under  instructions  from  the  Secretary  of  the 
Treasury.  The  currency  so  obtained,  with  the  currency 
collected  from  internal  revenue  and  from  other  sources, 
was  used  to  defray  the  ordinary  expenses  of  the  Govern- 
ment. The  surplus,  if  any,  was  applied,  as  far  as  it 
would  go,  to  the  redemption  of  the  lawful-money  obliga- 
tions as  they  fell  due,  and  after  their  maturity  to  the 
purchase  of  bonds  at  the  market  price. 

The  total  amount  of  gold  sold  was  $526,506,273.81, 
and  the  currency  received  therefor  amounted  to 
334,089.67. 

The  average  premium  obtained  was  20.3  per  cent. 


MONETARY  SYSTEM  OF  THE  U.  S.  293 

Redemption. 

Gold  coins  and  standard  silver  dollars,  being  standard 
coins  of  the  United  States,  are  not  "redeemable." 

Subsidiary  coins  and  minor  coins  may  be  presented,  in 
sums  or  multiples  of  $20,  to  the  Treasurer  of  the  United 
States  or  to  an  assistant  treasurer  for  redemption  or  ex- 
change into  lawful  money. 

United  States  notes  are  redeemable  in  United  States 
gold  coin  in  any  amount  by  the  Treasurer  and  all  the 
assistant  treasurers  of  the  United  States. 

Treasury  notes  of  1890  are  redeemable  in  United 
States  gold  coin  in  any  amount  by  the  Treasurer  and  all 
the  assistant  treasurers  of  the  United  States. 

National-bank  notes  are  redeemable  in  lawful  money 
of  the  United  States  by  the  Treasurer,  but  not  by  the  as- 
sistant treasurers.  They  are  also  redeemable  at  the  bank 
of  issue.  In  order  to  provide  for  the  redemption  of  its 
notes  when  presented,  every  national  bank  is  required  by 
law  to  keep  on  deposit  with  the  Treasurer  a  sum  equal  to 
5  per  cent  of  its  circulation. 

Gold  certificates  being  receipts  for  gold  coin,  are  re- 
deemable in  such  coin  by  the  Treasurer  and  all  assistant 
treasurers  of  the  United  States. 

Silver  certificates  are  receipts  for  standard  silver  dol- 
lars deposited,  and  are  redeemable  in  such  dollars  only. 

"Coin"  obligations  of  the  Government  are  redeemed 
in  gold  coin  when  gold  is  demanded  and  in  silver  when 
silver  is  demanded. 

Foreign  Coins  Not  Legal  Tender. 

Section  3584  of  the  Revised  Statutes  of  the  United 
States  provides  that  no  foreign  coins  shall  be  a  legal 
tender  in  the  United  States. 


294 


MONETARY  SYSTEM  OF  THE  U.  S. 


Denominations,  Weight,  and  Fineness  of  the  Coins  of  ifae 
United  States. 


GOLD. 

Denomination.               Fine  gold     Alloy  con-  Weight, 
contained.       tained.* 

Grains.  Grains.  Grains. 

One  dollar  ($1) ..       23.22  2.58  25.80 

Quarter  eagle  ($2.50) 58.05  6.45  64.50 

Three  dollars  ($3) 69.66  7.74  77.40 

Half  eagle  ($5)    116.10  12.90  129.00 

Eagle  ($10) 232.20  25.80  258.00 

Double  eagle  ($20) 464.40  51.60  616.00 

*  The  alloy  neither  adds  to  nor  detracts  from  the  value  of  the  coin. 

SILVER. 

Denomination.  Fine  silver    Alloy  con-       Weight, 

contained.       tained. 
Grains.        Grains.         Grains. 

Standard   dollar    • 371.25  41.25  412.50 

Half  dollar    , 173.61  19.29  192.90 

Quarter  doUar  86.805  9.645  96.45 

Dime 34.722  3.858  38.58 

Prior  to  the  act  of  February  21,  1853,  all  silver  coins  were 
legal  tender  in  all  payments  whatsoever.  The  act  of  February 
21,  1853,  reduced  the  weight  of  all  silver  coins  of  less  denomina- 
tion than  the  silver  dollar  about  7  per  cent,  to  be  coined  on  Gov- 
ernment account  only,  and  made  them  legal  tender  in  payment  of 
debts  for  all  sums  not  exceeding  $5. 


MINOR. 

Denomination.  Fine  copper  Alloy  con-     Weight, 

contained.       tained. 
Grains.        Grains.         Grains. 

Five  cents* 57.87  19.29  77.16 

One  centf 45.60  2.40  48. 

*  Seventy-five  per  cent  copper,  25  per  cent  nickel. 
t  Ninety-five  per  cent  copper,  5  per  cent  tin  and  zinc. 


MONETARY  SYSTEM  OF  THE  U.  S.  295 

Troy  weights  are  used,  and  while  metric  weights  are 
by  law  assigned  to  the  half  and  quarter  dollar  and  dime, 
troy  weights  still  continue  to  be  employed,  15,432  grains 
being  considered  as  the  equivalent  of  a  gram,  agreeably 
to  the  act  of  July  28, 1866. 

The  weight  of  $1,000  in  United  States  gold  coin  is 
53.75  troy  ounces,  equivalent  to  3.68  pounds  avoirdu- 
pois. The  weight  of  $1,000  in  standard  silver  dollars 
is  859.375  troy  ounces,  equivalent  to  58.92  pounds  avoir- 
dupois, and  the  weight  of  $1,000  in  subsidiary  silver  is 
803.75  troy  ounces,  equivalent  to  55.11  pounds  avoirdu- 
pois. 


''There  is  many  a  man  who  would  be  deterred  from 
dishonesty  by  the  frown  of  a  banker,  though  he  might 
care  but  little  for  the  admonitions  of  a  bishop." — Gilbart. 


CHAPTER  XV. 

MONETARY  SYSTEM  OF  THE  U.  S. 

No.  2 — Paper  Money. 

The  first  paper  money  ever  issued  by  the  Government 
of  the  United  States  was  authorized  by  the  acts  of  July 
17  and  August  5,  1861.  The  notes  issued  were  called 
"demand  notes,"  because  they  were  payable  on  demand 
at  certain  designated  subtreasuries.  They  were  receiva- 
ble for  all  public  dues,  and  the  Secretary  was  author- 
ized to  reissue  them  when  received,  but  the  time  within 
which  such  reissues  might  be  made  was  limited  to  De- 
cember 31,  18G2.  The  amount  authorized  by  these  acts 
was  $50,000,000.  An  additional  issue  of  $10,000,000 
was  authorized  by  the  act  of  February  12,  1862,  and 
there  were  reissues  amounting  to  $30,000.  The  demand 
notes  were  paid  in  gold  when  presented  for  redemption 
and  they  were  received  for  all  public  dues,  and  these  two 
qualities  prevented  their  depreciation.  All  other  United 
States  notes  depreciated  in  value  from  1862  until  the  re- 
sumption of  specie  payments. 

The  act  of  February  25,  1862,  provided  for  the  sub- 
stitution of  United  States  notes  in  place  of  the  demand 
notes,  and  the  latter  were  therefore  canceled  when  re- 
ceived. By  July  1, 1863,  all  except  $3,770,000  had  been 
retired,  and  nearly  three  millions  of  this  small  remainder 
were  canceled  during  the  next  fiscal  year.  These  notes 
were  not  legal  tender  when  first  issued,  but  they  were 
afterwards  made  so  by  the  act  of  March  17,  1862. 

297 


298  MONETAEY  SYSTEM  OF  THE  U.  S. 

United  States  Notes. 
The  principal  issue  of  United  States  paper  money  was 
officially  called  United  States  notes.  These  were  the 
well-known  "greenbacks"  or  "legal  tenders."  The  act 
of  February  25,  1862,  authorized  the  issue  of  $150,000,- 
000,  of  which  $50,000,000  were  in  lieu  of  an  equal 
amount  of  demand  notes,  and  could  be  issued  only  as  the 
demand  notes  were  canceled.  A  second  issue  of  $150,- 
000,000  was  authorized  by  the  act  of  July  11,  1862,  of 
which,  however,  $50,000,000  was  to  be  a  temporary 
issue  for  the  redemption  of  a  debt  known  as  the  tem- 
porary loan.  A  third  issue  of  $150,000,000  was  auth- 
orized by  the  act  of  March  3,  1863.  The  total  amount 
authorized,  including  the  temporary  issue,  was  $450,- 
000,000,  and  the  highest  amount  outstanding  at  any  time 
was  $449,338,902  on  January  30,  1864.  There  are  still 
outstanding  $346,681,016. 

The  reduction  from  the  original  permanent  issue  of 
$400,000,000  to  $346,681,016  was  caused  as  follows:  The 
act  of  April  12, 1866,  provided  that  United  States  notes 
might  be  retired  to  the  extent  of  $10,000,000  during  the 
ensuing  six  months,  and  that  thereafter  they  might  be 
retired  at  the  rate  of  not  more  than  $4,000,000  per  month. 
This  authority  remained  in  force  until  it  was  suspended 
by  the  act  of  February  4, 1868.  The  authorized  amount 
of  reduction  during  this  period  was  about  $70,000,000, 
but  the  actual  reduction  was  only  about  $44,000,000, 
No  change  was  made  in  the  volume  of  United  States 
notes  outstanding  until  after  the  panic  of  1873,  when, 
in  response  to  popular  demand,  the  Government  reissued 
$26,000,000  of  the  canceled  notes. 


MONETAKY  SYSTEM  OF  THE  U.  S.  299 

This  brought  the  amount  outstanding  to  $382,000,- 
000,  and  it  so  remained  until  the  resumption  act  of  Janu- 
ary 14,  1875,  provided  for  its  reduction  to  $300,000,000. 
The  process  was,  however,  again  stopped  by  the  act  of 
May  31,  1878,  which  required  the  notes  to  be  reissued 
when  redeemed.  At  that  time  the  amount  outstanding 
was  $346,681,016,  which  is  the  present  amount.  The 
amount  of  United  States  notes  redeemed  from  the  fund 
raised  for  resumption  purposes  since  January  1,  1879, 
to  June  30,  1908,  was  $680,581,146;  but  the  volume  out- 
standing is  undiminished  because  of  the  provisions  of 
the  act  of  May  31,  1878,  which  require  the  notes  so  re- 
deemed to  be  paid  out  again  and  kept  in  circulation. 

The  act  of  March  14, 1900,  also  directed  the  reissue  of 
United  States  notes  when  redeemed,  but  they  must  first 
be  exchanged  for  gold  as  provided  in  the  said  act.  The 
act  also  provides  that  when  silver  certificates  of  large 
denominations  are  canceled,  and  small  denominations  is- 
sued in  their  place,  a  like  volume  of  small  United  States 
notes  shall  from  time  to  time  be  canceled  and  notes  of 
$10  and  upward  issued  in  substitution  therefor. 

Gold  Certificates. 

The  act  of  March  3,  1863,  authorized  the  Secretary  of 
the  Treasury  to  receive  deposits  of  gold  coin  and  bulhon 
in  sums  not  less  than  $20,  and  to  issue  certificates  there- 
for in  denominations  not  less  than  $20,  said  certificates 
to  be  receivable  for  duties  on  imports.  Under  this  act 
deposits  of  gold  were  received  and  certificates  issued  until 
January  1,  1879,  when  the  practice  was  discontinued  by 
order  of  the  Secretary  of  the  Treasury.     The  purpose 


300  MONETARY  SYSTEM  OF  THE  U.  S. 

of  the  order  was  to  prevent  the  holders  of  United  States 
notes  from  presenting  them  for  redemption  in  gold, 
and  re-depositing  the  gold  in  exchange  for  gold  certifi- 
cates. No  certificates  were  issued  after  January  1, 1879, 
until  the  passage  of  the  bank  act  of  July  12,  1882,  which 
authorized  and  directed  the  Secretary  of  the  Treasury 
to  receive  gold  coin  and  bullion  and  issue  certificates. 
This  act,  however,  provided  that  "the  Secretary  of  the 
Treasury  shall  suspend  the  issue  of  gold  certificates 
whenever  the  amount  of  gold  coin  and  gold  bullion  in 
the  Treasury,  reserved  for  the  redemption  of  United 
States  notes,  falls  below  one  hundred  millions  of  dollars." 
The  act  of  March  14,  1900,  reenacted  this  provision, 
and  further  provided  that  the  Secretary  may,  in  his  dis- 
cretion, suspend  such  issue  whenever  and  so  long  as  the 
aggregate  amount  of  United  States  notes  and  silver  cer- 
tificates in  the  general  fund  of  the  Treasury  shall  exceed 
$60,000,000.  It  provided  further  that  of  the  amount  of 
such  certificates  outstanding  one-fourth,  at  least,  shall 
be  in  denominations  of  $50  or  less.  The  amount  of  gold 
certificates  now  outside  the  Treasury  is  $464,806,629. 
The  act  of  July  12,  1882,  made  them  receivable  for  cus- 
toms, taxes,  and  all  public  dues. 

Silver  Certificates. 

The  act  of  February  28, 1878,  authorizing  the  issue  of 
the  standard  silver  dollars,  provided  that  any  holder  of 
such  dollars  might  deposit  them  in  sums  not  less  than 
$10  with  the  Treasurer  or  any  assistant  treasurer  of  the 
United  States  and  receivecertificates  therefor,  in  denom- 
inations not  less  than  $10,  said  certificates  to  be  receiva- 
ble for  customs,  taxes,  and  all  public  dues.     The  act  of 


MONETAEY  SYSTEM  OF  THE  U.  S.  301 

August  4,  1886,  authorized  the  issue  of  the  smaller  de- 
nominations of  $1,  $2,  and  $5.  Silver  certificates  have 
practically  taken  the  place  in  circulation  of  the  standard 
silver  dollars  which  they  represent.  The  amount  outside 
of  the  Treasury  July  1,  1908,  was  $405,581,977,  while 
the  amount  of  standard  silver  dollars  outside  the  Treas- 
ury was  only  $76,354,933.  The  act  of  March  14,  1900, 
provided  that  thereafter  the  issue  of  silver  certificates 
should  be  limited  to  the  denominations  of  $10  and  under, 
except  that  10  per  cent  of  the  total  volume  of  such 
certificates,  in  the  discretion  of  the  Secretary  of  the 
Treasury,  may  be  issued  in  denominations  of  $20,  $50, 
and  $100.  Neither  silver  certificates  nor  silver  dollars 
are  redeemed  in  gold. 

Treasury  Notes,  Act  of  July  14,  1890. 

These  notes  were  authorized  by  the  act  of  July  14, 
1890,  commonly  called  the  "Sherman  Act."  The  Secre- 
tary of  the  Treasury  was  directed  to  purchase  each 
month  4,500,000  ounces  of  fine  silver  at  the  market  price, 
and  to  pay  for  the  same  with  Treasury  notes  redeemable 
on  demand  in  coin  and  legal  tender  for  all  debts,  public 
and  private,  except  where  otherwise  expressly  stipulated 
in  the  contract.  It  was  provided  in  the  act  that  when  the 
notes  should  be  redeemed  or  received  for  dues  they  might 
be  reissued,  but  that  no  greater  or  less  amount  of  such 
notes  should  be  "outstanding  at  any  time  than  the  cost 
of  the  silver  bullion  and  the  standard  silver  dollars  coined 
therefrom,  then  held  in  the  Treasury  purchased  by  such 
notes." 

The  authority  for  the  purchase  of  silver  bullion  under 
this  act  was  repealed  by  the  act  of  November  1,  1893,  up 


302  MONETAEY  SYSTEM  OF  THE  U.  S. 

to  which  date  the  Government  had  purchased  168,674,- 
682.53  fine  ounces,  at  a  cost  of  $155,931,002,  for  which 
Treasury  notes  were  issued.  The  amount  of  Treasury- 
notes  redeemed  in  gold  up  to  the  close  of  the  fiscal  year 
1908  was  $110,540,894  and  the  amount  redeemed  in 
standard  silver  dollars  was  $84,393,976.  Treasury  notes 
redeemed  in  standard  silver  dollars  are  canceled  and  re- 
tired in  accordance  with  the  requirements  of  the  act  of 
1890.  Sections  5  and  8  of  the  act  of  March  14,  1900, 
also  provide  for  the  cancellation  and  retirement  of  Treas- 
ury notes  to  an  amount  equal  to  the  coinage  of  standard 
silver  dollars  and  subsidiary  silver  from  the  bullion  pur- 
chased with  such  notes.  The  cancellation  of  notes  on 
account  of  coinage  since  March  14,  1900,  is  $66,555,026, 
so  that  there  remained  outstanding  June  30,  1908,  but 
$4,982,000. 

Fractional  Currency. 

When  specie  payments  were  suspended,  about  Janu- 
ary 1,  1862,  both  gold  and  silver  coins  disappeared  from 
circulation.  The  place  of  the  subsidiary  silver  coins  was 
for  a  time  supplied  by  the  use  of  tickets,  duebills,  and 
other  forms  of  private  obligation,  which  were  issued  by 
merchants,  manufacturers,  and  others  whose  business  re- 
quired them  to  "make  change."  Congress  soon  inter- 
fered, and  authorized,  first,  the  use  of  postage  stamps 
for  change;  second,  a  modified  form  of  postage  stamp 
called  postal  currency,  and  finally,  fractional  paper  cur- 
rency in  denominations  corresponding  to  the  subsidiary 
silver  coins.  The  highest  amount  authorized  was  $50,- 
000,000.  The  highest  amount  outstanding  at  any  time 
was  $49,102,660.27,  and  the  amount  still  outstanding. 


MONETARY  SYSTEM  OF  THE  U.  S.  303 

though  not  in  use  as  money,  is  $15,245,183.88,  of  which 
$8,375,934  is  officially  estimated  to  have  been  destroyed. 

NATIONAL  BANK  CURRENCY. 

Authorizing  Act. 

The  issue  of  circulating  notes  by  national  banking 
associations  was  first  authorized  by  an  act  entitled  "An 
act  to  provide  a  national  currency  secured  by  a  pledge  of 
United  States  stock,  and  to  provide  for  the  circulation 
and  redemption  thereof,"  approved  February  25,  1863, 
which  act  was  repealed  by  an  act  entitled  "An  act  to  pro- 
vide a  national  currency  secured  by  a  pledge  of  United 
States  bonds,  and  to  provide  for  the  circulation  and  re- 
demption thereof,"  approved  June  3, 1864.  The  act  ap- 
proved June  3, 1864,  with  subsequent  amendments  there- 
of, was  embodied  in  the  Revised  Statutes  of  the  United 
States  in  1873.  The  law  as  embodied  in  the  Revised 
Statutes  has  been  amended  from  time  to  time,  and  is  now 
contained  in  what  is  known  as  the  national-bank  act,  with 
amendments  thereof. 

Material  amendments  have  been  made  to  the  national- 
bank  act  during  the  past  few  years.  The  first,  dated 
March  14,  1900,  authorized  the  formation  of  national 
banks  with  minimum  capital  of  $25,000 ;  the  issue  of  cir- 
culation to  the  par  value  of  bonds  deposited,  and  reduced 
the  tax  on  circulation  secured  by  2  per  cent  bonds  to 
one-fourth  of  1  per  cent  semi-annually. 

The  act  of  June  22,  1906,  authorized  national  banks 
to  loan  to  one  interest  an  amount  not  in  excess  of  10 
per  cent  of  the  paid-in  capital  stock  and  surplus,  the 
aggregate,  however,  not  to  exceed  30  per  cent  of  the 


304  MONETARY  SYSTEM  OF  THE  U.  S. 

capital,  the  original  limitation  being  10  per  cent  of  the 
capital  stock. 

On  January  26,  1907,  an  act  was  approved  prohib- 
iting national  banks  or  other  corporations  organized 
by  authority  of  any  act  of  Congress  from  making  money 
contributions  in  connection  with  political  elections. 

At  the  following  session  of  Congress  the  banking  law 
was  further  amended  authorizing  the  organization  of 
national  currency  associations  and  the  issue  to  bank  mem- 
bers of  such  associations  of  additional  circulation  on  se- 
curities including  commercial  paper  held  by  the  national 
banking  associations.  The  act  further  authorized  the 
deposit  with  the  Treasurer  of  the  United  States,  in  trust, 
of  State,  municipal,  etc.,  bonds,  as  security  for  circula- 
tion, but  provided  that  additional  circulation  can  only  be 
issued  to  banks  having  an  unimpaired  capital,  and  sur- 
plus equal  to  20  per  cent  of  the  capital,  and  whose  circu- 
lation secured  by  United  States  bonds  amounts  to  at  least 
40  per  cent  of  their  capital  stock.  Additional  circulation 
however,  can  only  be  issued  at  such  times  and  under, 
such  conditions  as,  in  the  judgment  of  the  Secretary 
of  the  Treasury,  an  increase  in  national-bank  circulation 
is  warranted. 

Security. 

Under  the  provisions  of  existing  law  (1910)  a  nation- 
al bank  is  required  to  deposit  interest-bearing  bonds  of 
the  United  States  with  the  United  States  Treasurer  as 
security  for  its  circulating  notes  in  the  following  mini- 
mum amounts: 


MONETARY  SYSTEM  OF  THE  U.  S.  805 

1.  Banks  with  a  capital  not  exceeding  $150,000  must 
deposit  bonds,  par  value,  to  an  amount  not  less  than  one- 
fourth  of  their  capital  stock. 

2.  Banks  with  a  capital  exceeding  $150,000  must  de- 
posit bonds  to  the  amount  of  at  least  $50,000,  par  value. 

Circulating  notes  are  issued  against  United  States 
bonds  deposited  as  security  therefor  to  the  par  value  of 
the  bonds  or  of  the  market  value,  if  the  bonds  are  below 
par,  the  maximum  amount  issuable  on  bonds  being  mea- 
sured by  the  paid-in-capital  stock. 

Profits  on  Circulation. 

Tables  published  annually  by  the  Comptroller  of  the 
Currency  show  the  profit  arising  from  a  bank  investing 
its  funds  in  bonds  and  taking  out  circulation  thereon, 
compared  with  the  profits  from  investment  of  the  same 
funds  at  6  per  cent  per  annum.  This  profit  varies  with 
the  cost  of  the  bonds  and  the  rates  of  interest  current 
where  a  bank  is  located. 

Profits  on  Capital  Invested. 
In  the  Comptroller's  report  for  1907  was  a  tabular 
statement  showing  the  annual  net  earnings  and  divi- 
dends on  the  capital  of  national  banks  for  the  preceding 
thirty-eight  years,  based  upon  reports  made  to  the  Comp- 
troller by  the  banks.  The  annual  average  net  earnings 
and  dividends  paid  were  shown  to  be  $66,647,167  and 
$50,660,236,  respectively.  The  average  rate  of  dividends 
for  the  thirty-eight  years  was  8.76  per  cent,  the  average 
rate  for  the  year  1905  being  9.02 ;  for  1906, 10.4,  and  for 
the  ten  months  ending  July  1,  1907,  11.8. 

I.B.L.  Vol.  4—20 


806  MONETAEY  SYSTEM  OF  THE  U.  S. 

Reports  and  Examinations. 

Every  national  bank  is  required  by  law  to  make  to 
the  Comptroller  not  less  than  five  sworn  reports  every 
year,  showing  in  detail  its  resources  and  liabilities,  and 
it  is  required  to  publish  the  reports  in  a  local  newspaper; 
also  to  make  a  sworn  report  of  every  dividend  declared 
which  also  shows  gross  earnings,  losses,  expenses,  and 
net  profits. 

The  affairs  of  every  bank  are  also  examined  about 
twice  a  year  by  an  examiner,  who  verifies  its  assets  and 
audits  its  accounts,  and  the  examiner  is  empowered  by 
law  to  examine  every  officer  and  employee  of  the  bank 
under  oath,  if  necessary,  to  find  out  its  true  condition. 

Capital  Based  on  Population. 
A  national  bank  may  be  organized  by  not  less  than 
five  persons  anywhere  in  the  United  States,  subject  to 
the  following  requirements  as  to  capital  and  population. 

1.  With  not  less  than  $25,000  capital  in  any  place 
having  6,000  inhabitants  or  less. 

2.  With  not  less  than  $50,000  capital  in  any  city 
having  6,000  inhabitants  or  less. 

3.  With  not  less  than  $100,000  capital  in  any  city 
having  over  6,000  but  not  more  than  50,000  inhabitants. 

4.  With  not  less  than  $200,000  capital  in  any  city 
having  over  50,000  inhabitants. 

Amount  of  National-Bank  Circulation. 
The  aggregate  capital  of  the  7,453  national  banks  in 
the  fiscal  year  1915  was  $1,063,978,175,  with  a  total 
surplus  of  $714,117,131. 


CHAPTER  XVI. 

THE  FEDERAL  RESERVE  SYSTEM. 

On  June  23,  1913,  President  Wilson  personally  ap- 
peared before  Congress  and  called  public  attention  to 
the  deficiencies  in  the  existing  system  of  banking  and 
currency  in  the  United  States,  at  the  same  time  urging 
prompt  remedial  legislation  by  the  adoption  of  a  bill 
providing  for  the  establishment  of  a  system  of  Federal 
Reserve  Banks,  designed  "to  give  the  business  men  of 
this  country  a  banking  and  currency  system  by  means 
of  which  they  can  make  use  of  the  freedom  of  enterprise 
and  of  individual  initiative." 

"We  must  have  a  currency,"  said  the  President,  "not 
rigid  as  now,  but  readily,  elastically  responsive  to  sound 
credit,  the  expanding  and  contracting  credits  of  every- 
day transactions,  the  normal  ebb  and  flow  of  personal 
and  corporate  dealings.  Our  banking  laws  must  mobil- 
ize reserves;  must  not  permit  the  concentration  any- 
where in  a  few  hands  of  the  monetary  resources  of  the 
country  or  their  use  for  speculative  purposes  in  such 
volume  as  to  hinder  or  impede  or  stand  in  the  way  of 
other  more  legitimate,  more  fruitful  uses.  And  the  con- 
trol of  the  system  of  banking  and  of  issue  which  our 
new  laws  are  to  set  up,  must  be  public,  not  private,  must 
be  vested  in  the  Government  itself,  so  that  the  banks 
may  be  the  instruments,  not  the  masters,  of  business 
and  of  individual  enterprise  and  initiative." 

807 


308  THE  FEDERAL  RESERVE  SYSTEM. 

Congress  took  prompt  action,  following  this  message, 
and  the  Federal  Reserve  Bank  Act  became  the  law  of 
the  land  by  the  signature  of  the  President,  on  December 
23,  1913.  It  provided  for  the  establishment  of  not  less 
than  eight  and  not  more  than  twelve  Federal  Reserve 
Banks,  and  on  November  16,  1914,  twelve  such  banks 
were  accordingly  established  and  began  operation  in 
the  following  cities,  which  had  been  selected  as  the 
Reserve  cities  for  the  twelve  Reserve  Districts  estab- 
lished under  the  law: 

District  No.  1,  Boston,  Mass.;  No.  2,  New  York, 
N.  Y.;  No.  3,  Philadelphia,  Pa.;  No.  4,  Cleveland,  O.; 
No.  5,  Richmond,  Va. ;  No.  6,  Atlanta,  Ga. ;  No.  7,  Chi- 
cago, 111.;  No.  8,  St.  Louis,  Mo.;  No.  9,  Minneapolis, 
Minn.;  No.  10,  Kansas  City,  Mo.;  No.  11,  Dallas, 
Texas;  No!  12,  San  Francisco,  Cal. 

A  New  Epoch  in  Banking. 

With  the  adoption  of  the  Federal  Reserve  Act,  there 
was  a  general  feeling  that  American  business  and  bank- 
ing had  entered  upon  a  new  epoch.  Many  bankers 
throughout  the  country  hastened  to  apply  for  member- 
ship in  the  respective  Federal  Reserve  Districts  and 
the  sentiment  among  the  banks  was  typically  expressed 
by  the  directors  of  the  National  Copper  Bank,  who  said: 
"As  we  watched  the  development  of  the  Act  in  Con- 
gressional debate,  we  became  impressed  with  the  advan- 
tages to  be  gained  through  its  operation,  and  our  later 
and  more  careful  study  has  only  strengthened  our  earlier 
impressions. 

"The  great  essentials — ^reserves,  circulation,  discounts, 
acceptances,  refunding  of  bonds,  foreign  branches,  farni 


THE  FEDERAL  RESERVE  SYSTEM.  309 

loans,  clearing  of  transit  items — are  well  provided  for, 
but  with  a  wisdom  which  recognizes  the  dangers  of  sud- 
den change,  and  allows  years  in  which  to  perfect  the 
transferring  of  banking  operations  from  the  old  course 
to  the  new.  It  is  true  there  is  great  power  centered 
at  Washington,  but  the  country's  past  experience  with 
the  Treasury  Department  has  been  such  as  to  warrant 
confidence  in  the  future  policies  of  the  Federal  Reserve 
Board — ^the  central  controlling  body  established  by  the 
new  Act. 

"Doubtless  there  will  be  alterations  in  the  Act  from 
time  to  time,  as  experience  points  out  better  methods 
here  and  there,  but  in  the  main  we  believe  the  Act  will 
stand  the  test,  and  marks  the  longest  step  forward  that 
American  business  has  taken  in  many  a  day." 

Although  the  Rer serve  Banks  have  not  yet  been  sub- 
jected to  any  severe  test,  the  belief  is,  in  fact,  general 
that  the  United  States  has  now  the  best  arrangement  in 
its  history  for  making  the  banking  system  responsive  to 
the  needs  of  trade  and  the  monetary  system  elastic 
enough  to  prevent  the  recurrence  of  the  once-dreaded 
panics,  such  as  those  of  1893  and  1907. 

Main  Features  of  the  Act. 

Under  the  new  system  the  United  States,  as  abeady 
indicated,  is  divided  into  twelve  Federal  Reserve  Dis- 
tricts, each  having  a  regional  Federal  Reserve  Bank 
with  a  capital  of  at  least  $4,000,000  subscribed  by  the 
member  banks  of  the  district.  National  banks  are 
obliged  to  become  members,  while  with  State  banks  and 
trust  companies  membership  is  optional.  There  are  no 
depositors  in  the  Reserve  Bank  of  a  given  district 


310  THE  FEDERAL  RESERVE  SYSTEM. 

except  the  member  banks  themselves  and  the  United 
States  Government.  The  Government  under  the  Act 
no  longer  deposits  its  reserve  funds  in  ordinary  banks, 
as  formerly,  or  lets  them  lie  unused  in  the  vaults  of  the 
sub-treasuries ;  but  places  them  in  the  Federal  Reserve 
Banks,  subject  to  the  supervision  of  the  Federal  Reserve 
Board  at  Washington,  and  to  the  direct  authority  over 
them  of  the  Secretary  of  the  Treasury. 

The  Act  provided  for  an  issue  of  $500,000,000  of  new 
Treasury  notes  of  the  United  States,  to  be  apportioned 
among  the  several  Federal  Reserve  Banks,  and  to  be 
supplied  by  them  in  turn  to  the  ordinary  member  banks 
at  such  times  as  money  is  especially  needed  for  the 
transaction  of  business,  as  when  crops  are  being  moved 
and  so  on.  This  supply  of  currency  is  secured  by  the 
banks  depositing  commercial  paper  with  the  Federal 
Reserve  Bank. 

How  Panics  Are  to  Be  Prevented. 

In  ordinary  times  the  business  of  banking  goes  on 
very  much  as  before  the  passage  of  the  new  Act,  and 
merchants  and  citizens  can  see  little  difference  in  condi- 
tions. The  ordinary  banks  continue  to  be  independent 
concerns,  receiving  deposits  and  lending  money  as  be- 
fore. But  in  exceptional  times,  as  in  1907,  a  great 
difference  will  be  visible.  In  the  panic  of  1907  the 
banks  would  not  even  allow  a  depositor  to  draw  out  his 
own  money — ^much  less  would  they  make  the  customary 
loans  on  commercial  paper,  or  other  approved  security, 
even  to  their  most  reliable  customers.  Thus,  at  the 
very  time  when  the  banks  were  most  needed  to  aid  and 
encourage  business,  they  ceased  their  functions  and  only 


THE  FEDERAL  RESERVE  SYSTEM.  311 

magnified  and  intensified  the  business  troubles  that  with 
a  better  and  more  elastic  system  they  could  have  pre- 
vented. The  first  symptom  of  financial  stress  led  every 
banker  to  protect  his  own  reserves,  lest  he  might  become 
the  victim  of  a  "run."  He  lacked  the  support  of  a 
higher  financial  power,  such  as  is  provided  by  the  Fed- 
eral Reserve  Bank  system,  which  promises  a  complete 
remedy  for  such  conditions,  by  supplying  the  funds  to 
meet  emergencies  upon  the  deposit  of  ordinary  commer- 
cial paper  by  the  member  banks.  All  the  banks  are 
now  practically  federated  for  mutual  help  under  the 
auspices  of  a  central  Government  board.  For  the  first 
time  our  national  banking  system  possesses  the  real 
strength  that  lies  in  unity. 


Below  we  give  a  brief  outline  of  the  provisions  of  the 
new  Act  and  the  manner  in  which  the  Federal  Reserve 
Bank  was  brought  to  the  present  state  of  development : 

The  Federal  Reserve  Act. 

"An  Act,  to  provide  for  the  establishment  of  Federal 
Reserve  Banks,  to  furnish  an  elastic  currency,  to  afford 
means  of  re-discounting  commercial  paper,  to  establish 
a  more  effective  supervision  of  banking  in  the  United 
States,  and  for  other  purposes." 

Organization. 

The  organization  and  selecting  of  the  Federal  Re- 
serve Cities  was  left  in  the  hands  of  the  Secretary  of  the 
Treasury,  Secretary  of  Agricultm-e  and  the  Comptroller 
of  the  Currency,  this  committee  to  designate  not  fewer 
than  eight  nor  more  than  twelve  cities  to  be  known  as 


312  THE  FEDERAL  RESERVE  SYSTEM. 

Federal  Reserve  Cities.  The  continental  United  States 
to  be  divided  into  districts,  each  district  to  contain  only 
one  of  such  Federal  Reserve  Cities,  Alaska  being 
excluded. 

Each  Reserve  Bank  must  have  a  subscribed  capital 
of  not  less  than  $4,000,000.00. 

Each  Federal  Reserve  Bank  may  establish  branch 
banks  within  the  district  in  which  it  is  located.  Such 
branches  shall  be  operated  by  a  Board  of  Directors 
under  rules  and  regulations  prescribed  by  the  Federal 
Reserve  Board. 

Federal  Reserve  Board. 

A  Federal  Reserve  Board  is  created  which  shall  con- 
sist of  seven  members,  including  the  Secretary  of  the 
Treasury  and  the  Comptroller  of  the  Currency,  who 
shall  be  members  ex-oflicio,  and  five  members  appointed 
by  the  President  of  the  United  States  by  and  with  the 
advice  and  consent  of  the  Senate — not  more  than  one 
member  being  selected  from  any  one  Federal  Reserve 
district,  the  President  to  have  due  regard  to  a  fair  repre- 
sentation of  the  different  commercial,  industrial  and 
geographical  divisions  of  the  country.  The  five  mem- 
bers appointed  shall  devote  their  entire  time  to  the  busi- 
ness of  the  Federal  Reserve  Board  and  shall  each  receive 
an  annual  salary  of  $12,000,  payable  monthly,  together 
with  actual  necessary  traveling  expenses.  The  Comp- 
troller of  the  Currency  as  ex-officio  member  shall,  in 
addition  to  the  salary  now  paid  him  as  Comptroller, 
receive  the  sum  of  $7,000  annually  for  his  services  as  a 
member  of  said  board. 


THE  FEDERAL  RESERVE  SYSTEM,  313 

Membership. 

Every  National  bank  must  become  a  stockholder  in 
the  Reserve  Bank  of  its  respective  district,  and  shall 
subscribe  to  the  capital  stock  of  the  Federal  Reserve 
Bank  in  a  sum  equal  to  six  per  centum  of  the  paid  up 
capital  and  surplus  of  such  bank,  payable  as  follows: 
One  sixth  on  call,  one  sixth  within  three  months,  one 
sixth  within  six  months  and  the  remainder  subject  to 
call  when  deemed  necessary. 

State  banks  and  Trust  companies  are  not  required 
to  become  members,  membership  being  optional.  Every 
shareholder  of  a  Federal  Reserve  Bank  shall  be  held 
responsible  equally,  and  ratably,  and  not  one  for 
another,  for  all  contracts,  debts  and  engagements  of 
such  bank  to  the  extent  of  the  amount  of  their  subscrip- 
tion to  such  stock  at  the  par  value  thereof,  which  shall 
be  $100.00. 

Public  Subscription^ 

In  the  event  that  the  subscription  by  National  banks 
should  be  insufficient,  the  Organization  Committee  may 
offer  to  the  public,  at  par,  such  an  amount  of  stock  as 
they  may  determine.  No  individual,  co-partnership  or 
corporation  other  than  a  member  bank  shall  hold  at  any 
time  more  than  $25,000.00  par  value  of  stock  in  any 
Federal  Reserve  Bank. 

Board  of  Directors. 

Every  Federal  Reserve  Bank  shall  be  conducted 
under  the  supervision  and  control  of  a  Board  of  Direc- 
tors who  shall  perform  the  duties  usually  appertaining 
to  the  office  of  directors  of  banking  associations,  and 


314  THE  FEDERAL  RESERVE  SYSTEM. 

shall  be  selected  as  hereinafter  specified  and  consist  of 
nine  members  holding  office  for  three  years  and  divided 
into  three  classes,  designated  as  Class  A,  B  and  C. 

Class  A  shall  consist  of  three  members  who  shall  be 
chosen  by  and  be  representative  of  the  stock  holding 
banks. 

Class  B  shall  consist  of  three  members  who  at  the 
time  of  their  election  shall  be  actively  engaged  in  their 
district,  in  commerce,  agriculture,  or  some  other  indus- 
trial pursuit. 

Class  C  shall  consist  of  three  members  who  shall  be 
designated  by  the  Federal  Reserve  Board. 

Directors  shall  receive  in  addition  to  any  compensa- 
tion provided  a  reasonable  allowance  for  necessary  ex- 
penses in  attending  meetings  of  their  respective  board. 
Any  compensation  shall  be  subject  to  the  approval  of 
the  Federal  Reserve  Board. 

At  the  first  meeting  of  the  full  Board  of  Directors 
it  shall  be  the  duty  of  the  directors  of  Classes  A,  B  and 
C,  respectively,  to  designate  one  of  the  members  of  each 
class  whose  term  of  office  shall  expire  in  one  year,  from 
the  first  of  January  nearest  to  date  of  such  meeting, 
one  whose  term  shall  expire  at  the  end  of  two  years,  and 
one  whose  term  shall  expire  at  the  end  of  three  years 
from  said  date.  Thereafter  every  director  shall  be 
chosen  for  a  term  of  three  years. 

Depositors. 

There  are  no  depositors  in  the  Rerserve  Bank  of  a 
district  other  than  the  members  of  the  district  and  the 
IJnited  States  Government. 


THE  FEDERAI  RESERVE  SYSTEM.  315 

Discount  Operations. 

Upon  the  indorsement  of  any  of  its  member  banks, 
with  a  waiver  of  demand,  notice  and  protest  by  such 
bank,  a  Federal  Reserve  Bank  may  discount  notes, 
drafts  and  bills  of  exchange  arising  out  of  commercial 
transactions.  The  Federal  Reserve  Board  to  have  the 
right  to  determine  or  define  the  character  of  the  paper 
thus  eligible  for  discount.  Notes,  drafts,  and  bills  ad- 
mitted to  discount  under  the  terms  above  must  have  a 
maturity  at  the  time  of  discount  of  not  more  than  ninety 
days,  provided  that  notes,  drafts,  and  bills  drawn  or 
issued  for  agricultural  purposes  or  based  on  live  stock, 
and  having  a  maturity  not  exceeding  six  months,  may 
be  discounted  in  an  amount  to  be  limited  to  a  percentage 
of  the  capital  of  the  Federal  Reserve  Bank  to  be  ascer- 
tained and  fixed  by  the  Federal  Reserve  Board. 

Any  Federal  Reserve  Bank  may  discount  accept- 
ances which  are  based  on  the  importation  or  exportation 
of  goods  and  which  have  a  maturity  at  time  of  discount 
of  not  more  than  three  months  and  indorsed  by  at  least 
one  member  bank.  The  amount  of  acceptances  so  dis- 
counted shall  at  no  time  exceed  one-half  of  the  paid  up 
capital  stock  and  surplus  of  the  bank  for  which  the  re- 
discounts are  made. 

Earnings. 

After  all  necessary  expenses  have  been  paid  or  pro- 
vided for,  the  stockholders  shall  be  entitled  to  receive  an 
annual  dividend  of  six  per  centum  on  the  paid  in  capital 
stock,  whicl:  dividend  shall  be  cumulative.  After  all 
such  dividend  claims  have  been  fully  met,  all  the  net 
earnings  shall  be  paid  to  the  United  States  as  a  franchise 


316  THE  FEDERAL  RESERVE  SYSTEM. 

tax,  except  that  one-half  of  such  net  earnings  shall  be 
paid  into  a  surplus  fund  until  it  shall  amount  to  forty 
per  centum  of  the  paid  in  capital  stock  of  such  bank. 

The  Federal  Advisory  Council. 

The  Act  provides  for  a  Federal  Advisory  Council  of 
twelve  members  (one  representing  each  Federal  Reserve 
District)  who  are  appointed  respectively  by  the  directors 
of  the  Heserve  Banks  for  a  term  of  one  year.  This  Coun- 
cil meets  at  least  four  times  a  year  in  Washington,  D.  C, 
and  is  empowered  to  confer  with  the  Federal  Reserve 
Board  on  general  business  conditions;  to  make  oral  or 
written  representations  concerning  matters  within  the 
jurisdiction  of  the  Board,  and  to  call  for  information 
and  make  recommendations  in  regard  to  discount  rates, 
rediscount  business,  note  issues,  reserve  conditions  in  the 
various  districts,  the  purchase  and  sale  of  gold  or  securi- 
ties by  Reserve  Banks,  and  the  general  affairs  of  the 
reserve  banking  system. 

Duties  of  the  Reserve  Board. 

The  Federal  Reserve  Board  exercises  a  general  super- 
vision over  the  affairs  and  management  of  the  Federal 
Reserve  banks.  It  has  the  power  to  discount  paper, 
issue  Federal  Reserve  notes,  and  perform  other  banking 
functions  prescribed  by  the  law.  It  appoints  its  own 
officers  and  employes,  and  derives  its  support  from 
assessments  levied  on  the  Reserve  Banks.  Its  head- 
quarters are  in  the  Treasury  Department  at  Wash- 
ington. 


THE  FEDERAL  RESERVE  SYSTEM.  Sl7 

Federal  Reserve  Agents. 

In  each  district  there  is  a  Federal  Reserve  Agent, 
appointed  by  the  Federal  Reserve  Board,  who  acts  as 
chairman  of  the  board  of  directors  of  a  Reserve  Bank, 
maintains  a  local  office  of  the  Federal  Reserve  Board, 
makes  reports  to  that  body  and  generally  acts  as  its 
representative  in  that  district.  Thus  the  central  Board 
is  enabled  to  keep  in  close  touch  with  business  conditions 
in  each  district  at  all  times  and  seasons. 

The  chief  executive  officer  of  each  Reserve  Bank  is 
known  as  its  governor,  and  is  appointed  as  such  by  the 
directors  of  the  bank.  He  presides  at  meetings  of  the 
executive  committee,  makes  transfers  of  securities,  and 
jointly  with  the  cashier  signs  all  certificates  of  stock  of 
the  bank.  The  other  officers  of  each  Reserve  Bank  (all 
chosen  by  the  board  of  directors)  consist  of  a  first 
and  second  vice-governor  and  a  secretary-treasurer  or 
cashier. 

Influence  of  the  New  System. 

The  advantages  of  the  Federal  Reserve  system  began 
to  be  apparent  very  soon  after  its  establishment.  Thus, 
in  their  first  annual  report  to  the  Federal  Reserve 
Board,  the  directors  of  the  Federal  Reserve  Bank  of 
Chicago  said:  "This  bank  opened  on  November  16, 
1914,  just  as  business  was  beginning  to  recover  from  the 
shock  occasioned  by  the  declaration  of  war  in  Europe. 
After  that  date  the  steadying  and  quieting  influence 
of  the  Federal  Reserve  system  began  to  be  felt  and  a 
quick  reduction  began  in  the  high  rates  of  interest  then 
prevailing.  By  January  1,  1915,  a  better  tone  was 
apparent." 


S18  THE  FEDERAL  RESERVE  SYSTEM. 

Regarding  the  discounting  (or  re-discounting)  of 
commercial  paper  by  the  member  banks,  this  typical 
report  said : 

"It  is  the  policy  of  the  bank  to  lend  liberal  assistance 
to  deserving  banks  for  seasonal  or  emergency  purposes, 
and  on  the  other  hand  to  discourage  any  tendency 
toward  over-expansion. 

"From  the  outset,  the  officers  have  undertaken  by 
correspondence  and  by  personal  interview  to  familiarize 
member  banks  with  the  procedure  in  discounting,  which 
has  been  made  as  simple  and  expeditious  as  possible,  all 
unnecessary  formality  being  eliminated." 

Importance  to  the  Community. 

Of  the  importance  to  the  community  of  the  new  bank- 
ing system  and  safeguard,  the  Chicago  directors  said: 

"Notwithstanding  the  almost  negligible  demands  on 
most  of  them  for  either  credit  or  currency,  the  Federal 
Reserve  Banks  have  performed  an  important  function 
in  the  creating  of  confidence  and  in  stabilizing  the  finan- 
cial structure  of  the  country.  During  the  several  very 
critical  periods  this  year  the  system  fully  demonstrated 
its  worth,  inspiring  confidence  and  banishing  fear,  and 
forestalling  panic  from  the  mere  fact  of  its  existence. 

Attitude  Toward  Member  Banks. 

"The  Federal  Resei-ve  Bank  of  Chicago  belongs  to 
its  aiembers.  They  have  furnished  the  entire  capitaliza- 
tion and  are  the  sole  depositors,  they  have  elected  six  of 
the  nine  directors  and  the  directors  in  turn  have  elected 
all  the  officers  of  the  bank  except  the  chairman  of  the 
Board.    Furthermore,  the  Federal  Reserve  Board  has 


THE  FEDERAL  RESERVE  SYSTEM.  319 

stated  its  policy  to  be  that  it  does  not  desire  to  interfere 
with  the  management  of  the  banks  except  to  see  that 
the  law  is  observed.  Therefore,  the  attitude  toward 
member  banks  is  one  of  cordial  co-operation  for  the  pur- 
pose of  securing  for  them  and  through  them  for  the 
business  community  and  the  public  every  advantage 
intended  and  possible  under  the  Act. 

"Co-operation  between  the  Federal  Reserve  Banks 
also  has  been  evidenced  by  the  organization  of  a  con- 
ference of  Governors  for  the  purpose  of  considering 
problems  and  questions  that  have  arisen,  and  exchang- 
ing views  in  order  that  all  may  have  the  benefit  of  the 
views  of  each." 

A  Great  Constructive  Measure. 

"The  Federal  Reserve  Act  became  a  law  as  a  great, 
far-reaching  constructive  measure  to  bring  co-ordination 
and  unity,  consohdation  and  central  control,  out  of  our 
separated  commercial  banks  under  individual  control," 
said  a  Reserve  Bank  director  (Mr.  E.  L.  Johnson)  to 
a  group  of  Iowa  bankers  after  the  first  year's  experience 
of  the  operation  of  the  Act.  "It  does  this  and  more. 
The  Federal  Reserve  Banking  system- forms  a  financial 
base  on  which  commercial  business  may  depend  in  its 
expansion  and  extension  into  new  fields.  Producers 
and  dealers  in  commodities  need  no  longer  fear  an  inade- 
quate money  market  on  which  to  float  commercial  paper. 
The  new  banks  created  are  not  supposed  to  do  any  busi- 
ness of  moment  or  to  initiate  anything.  All  that  is  left 
to  the  public,  and  all  banking  is  to  be  done  as  before 
through  the  already  existing  banks.  The  new  system 
provides  a  place,  a  fund,  a  means  of  creating  credit,  a 


S20  THE  FEDERAL  RESERVE  SYSTEM. 

system  of  exchanges,  designed  to  be  equal  to  any  emer- 
gency which  the  commercial  banks  of  the  country  will 
have  to  face,  and  to  supply  all  the  fair,  legitimate  needs 
of  commerce  now  apparent. 

"The  great  object  of  the  Act  is  to  aid  business — its 
regulation  of  banks  is  because  they  are  instruments  and 
most  important  aids  of  commerce." 

Under  the  Reserve  Bank  system,  the  assurance  the 
member  banks  have  is  the  assurance  to  the  management 
that  they  can  always  cash  in  their  commercial  notes  and 
meet  their  obligations  in  any  emergency;  the  assurance 
to  the  depositor  that  his  money  will  be  paid  to  him  on 
demand  in  cash  in  any  emergency ;  the  assurance  to  their 
commercial  borrowers  that  they  will  not  be  compelled 
to  shut  down  for  lack  of  funds  to  buy  goods  or  material, 
or  of  currency  for  their  payrolls. 

Practical  Guarantee  of  Deposits. 

The  original  National  Bank  Act  provided  for  super- 
vision of  banks,  and  its  amendments  increased  the  effi- 
ciency of  this  supervision.  The  Federal  Reserve  Act 
provides  additional  safeguards.  The  Comptroller  of 
the  Currency  said:  "Under  the  provisions  of  the  new 
law,  the  failure  of  efficiently  managed  banks  is  practic- 
ally impossible." 

The  more  stringent  oversight  and  regulation  provided 
by  the  Act  gives  a  hope,  at  least,  that  every  member 
bank  is  solvent,  and  will  so  remain  or  be  compelled  to 
close;  and  that,  should  it  close,  its  assets  will  pay  its 
liabilities;  that  is,  practically  it  gives  every  depositor  in 
a  member  bank  additional  assurance  that  his  money  in 
the  bank  is  safe. 


CHAPTER  XVII. 

MONETARY  EVENTS  SINCE  1786. 

1786, — Establishment  of  the  double  standard  in  the 
United  States  with  a  ratio  of  1  to  15.25 ;  that  is,  on  the 
basis  of  123.134  grains  of  fine  gold  for  the  half  eagle,  or 
$5  piece,  and  375.64  grains  of  fine  silver  for  the  dollar, 
without  any  actual  coinage. 

1792. — Adoption  of  the  ratio  of  1  to  15  and  establish- 
ment of  a  mint  with  free  and  gratuitous  coinage  in  the 
United  States;  the  silver  dollar  equal  to  371%  grains 
fine,  the  eagle  to  247%  grains  fine. 

1803, — Establishment  of  the  double  standard  in 
France  on  the  basis  of  the  ratio  of  1  to  15%,  notwith- 
standing the  fact  that  the  market  ratio  was  then  about  1 
to  15. 

1810. — Introduction  of  the  silver  standard  in  Russia 
on  the  basis  of  the  ruble  of  17.99  grams  of  fine  silver,  fol- 
lowed in  1871  by  the  coinage  of  imperials,  or  gold  pieces 
of  5  rubles,  of  5.998  grams;  therefore,  with  a  ratio  of  1 
to  15.  This  ratio  was  changed  by  the  increase  of  the  im- 
perial to  5  rubles  15  copecks,  and  later  to  1  to  15.45. 

1815. — Great  depreciation  of  paper  money  in  Eng- 
land, reaching  26%  per  cent  in  May.  Course  of  gold,  £5 
6s  and  of  silver  71%d  per  ounce  standard.  In  Decem- 
ber the  loss  was  only  6  per  cent;  gold  at  this  period  was 
quoted  at  £4  3s  and  of  silver  at  64d. 

I.B.L.  Vol.  4—21 


322  MONETAEY  EVENTS  SINCE  1786. 

1816, — Abolition  of  the  double  standard  in  England, 
which  had  had  as  its  basis  the  ratio  of  1  to  15.21,  and 
adoption  of  the  gold  standard  on  the  basis  of  the  pound 
sterling  at  7.322  grams  fine  in  weight. 

Coinage  of  divisional  money  at  the  rate  of  66d  per 
ounce.  Extreme  prices,  £4  2s  for  gold  and  64d  for  sil- 
ver in  January,  £3  18s  6d  and  59%d  in  December. 

Substitution  for  the  ratio  of  1  to  15.5  in  Holland,  es- 
tablished by  a  rather  confused  coinage,  of  the  ratio  of  1 
to  15%. 

1819. — Abolition  of  forced  currency  in  England. 
Price  of  gold,  £3  17s  10%d  and  of  silver  62d  per  ounce 
in  October,  against  £4  Is  6d  and  67d  in  February.  (The 
price  of  silver  given  hereafter  represents  the  average 
rate  per  ounce  standard — ^that  is,  the  mean  between  the 
highest  price  and  the  lowest  price  quoted  during  the 
year.) 

1832. — Introduction  of  the  monetary  system  of 
France  in  Belgium,  with  a  decree  providing  for  the  coin- 
age of  pieces  of  20  and  40  francs,  which,  however,  were 
not  stamped.    Silver,  59%d. 

183^. — Substitution  of  the  ratio  of  1  to  16  for  that  of 
1  to  15  in  the  United  States  by  reducing  the  weight  of 
the  eagle,  ten-dollar  gold  piece,  from  270  grains  to  258 
grains. 

In  1837  the  fineness  of  the  United  States  gold  coins 
was  raised  from  .899225  to  .900,  and  the  silver  coins  from 
.8924  to  .900,  giving  a  ration  of  1  to  15.988,  and  fixing 
the  standard  weight  of  the  silver  doUar  at  412%  grains. 
Silver,  59  ll-16d. 


MONETARY  EVENTS  SINCE  1786.  323 

18S5, — Introduction  of  the  company  rupee,  a  piece  of 
silver  weighing  165  grains  fine,  in  India  in  place  of  the 
sicca  rupee.  Creation  of  a  trade  coin — the  mohur,  or 
piece  of  15  rupees — containing  165  grains  of  fine  gold. 
Silver,  59  ll-16d. 

18^7, — Abolition  of  the  double  standard  in  Holland 
by  the  introduction  of  the  silver  standard  on  the  basis  of 
a  1-florin  piece  .945  grams  fine,  the  coinage  of  which  had 
already  been  decreed  in  1839.     Silver,  59  ll-16d. 

1847, — Discovery  of  the  gold  mines  of  Cahfomia. 

184.8. — Coinage  in  Belgium  of  pieces  of  10  and  25 
francs  in  gold,  a  shade  too  light.  These  pieces  were  de- 
monetized and  withdrawn  from  circulation  in  1884.  Sil- 
ver, 59%d. 

1848, — Replacing  the  ratio  of  1  to  16  in  Spain,  which 
had  been  in  force  since  1786,  by  that  of  1  to  15.77. 

1850, — Introduction  of  the  French  monetary  system 
in  Switzerland  without  any  actual  coinage  of  gold  pieces. 
Silver,  60  l-16d. 

1851, — ^Discovery  of  the  gold  mines  in  Australia. 

1853, — Lowering  of  the  weight  of  silver  pieces  of  less 
value  than  $1  to  the  extent  of  7  per  cent  in  the  United 
States  and  limitation  of  their  legal-tender  power  to  $5. 
Silver,  61%d. 

1858, — Maximum  of  the  production  of  gold  reached 
in  Cahfomia  when  it  amounted  to  $65,000,000. 

1854' — Introduction  of  the  gold  standard  in  Portugal 
on  the  basis  of  the  crown  of  16.257  grams  fine.  Before 
this  period  the  country  had  the  silver  standard,  with  a 
rather  large  circulation  of  gold  coins  stamped,  on  the 


824  MONETARY  EVENTS  SINCE  1786. 

basis  of  1  to  I5I/2  in  1835  and  1  to  16%  in  1847.     Silver, 
Cll/sd. 

1854. — Modification  of  the  ratio  of  1  to  15.77  in  Spain 
by  raising  it  to  1  to  15.48,  and  by  lowering  the  piaster 
from  23.49  grams  to  23.36  grams  fine. 

1854. — Introduction  of  the  silver  standard,  as  it  ex- 
isted in  the  mother  country,  in  Java,  in  place  of  the  ideal 
Javanese  money,  and  coinage  of  colonial  silver  pieces. 

1857, — Conclusion  of  a  monetary  treaty  between  Aus- 
tria and  the  German  States,  in  accordance  with  which  1 
pound  of  fine  silver  (one-half  a  kilogram)  was  stamped 
into  30  thalers,  or  52%  florins  of  south  Germany,  or  45 
Austrian  florins,  resulting  in  1  thaler  equaling  1%  Ger- 
man florins,  or  1%  Austrian  florin.    Silver,  61%d. 

1861. — Law  decreeing  the  coinage  of  gold  pieces  of  10 
and  20  francs  exactly  equal  to  French  coins  of  the  same 
denomination  in  Belgium.     Silver,  61%d. 

1862. — Adoption  of  the  French  monetary  system  by 
Italy.     Silver,  61  7-16d. 

1865. — Formation  of  the  Latin  Union  between 
France,  Belgium,  Switzerland  and  Italy  on  the  basis  of 
a  ratio  of  1  to  15%.     Silver,  61  l-16d. 

1868. — Adoption  of  the  French  monetary  system  by 
Roumania,  with  the  exclusion  of  the  5-f  ranc  silver  piece, 
which  was,  however,  stamped  in  1881  and  1883.    Silver, 

eoi/gd. 

1868. — Admission  of  Greece  into  the  Latin  Union. 
The  definite  and  universal  introduction  of  the  French 
monetary  system  into  the  country  was  effected  only  in 
1888. 


MONETARY  EVENTS  SINCE  1786.  325 

1868. — Adoption  of  the  French  monetary  system,  with 
the  peseta  or  franc  as  the  unit,  by  Spain.  The  coinage 
of  gold  alphonses  d'or  of  25  pesetas  was  made  only  in 
1876. 

187X. — Replacing  of  the  silver  standard  in  Germany 
by  the  gold  standard.  Coinage  in  1873  of  gold  pieces 
of  5,  10  and  20  marks  pieces,  the  latter  weighing  7.168 
grams  fine.     Silver,  60%d. 

1871, — Estabhshment  of  the  double  standard  in  Japan 
with  the  ratio  of  1  to  16.17  by  the  coinage  of  the  gold  yen 
of  1.667  grams  and  of  the  silver  yen  of  26.956  grams, 
both  with  a  fineness  of  .900. 

1873. — Increase  of  the  intrinsic  value  of  the  subsi- 
diary coins  of  the  United  States.  Replacing  of  the 
double  standard  by  the  gold  standard.  Reduction  of 
the  cost  of  coinage  of  gold  to  one-fifth  per  cent,  the  to- 
tal aboHtion  of  which  charge  was  decreed  in  1875.  Cre- 
ation of  a  trade  dollar  of  420  grains,  with  a  fineness  of 
.900.     Silver,  59l/4d. 

1873. — Suspension  of  the  coinage  of  5-franc  pieces  in 
Belgium. 

1873. — Limitation  of  the  coinage  of  5-francs  on  indi- 
vidual account  in  France. 

1873. — Suspension  of  the  coinage  of  silver  in  Holland. 

1873. — Formation  of  the  Scandinavian  Monetary 
Union.  Replacing  of  the  silver  standard  in  Denmark, 
Sweden  and  Norway  by  that  of  gold  on  the  basis  of  the 
krone.  Coinage  of  pieces  of  10  and  20  kroner,  the  lat- 
ter weighing  8.961  grams,  with  a  fineness  of  .900. 

1874' — Introduction  of  the  system  of  contingents  for 
the  coinage  of  5-franc  silver  pieces  in  the  Latin  Union. 
Silver,  58  5-16d. 


326  MONETARY  EVENTS  SINCE  1786. 

1875. — Suspension  of  the  coinage  of  silver  on  indi- 
vidual account  in  Italy.    Silver,  56%d. 

1875. — Suspension  of  the  coinage  of  silver  on  account 
of  the  Dutch  colonies. 

1875. — Introduction  of  the  double  standard  in  Hol- 
land on  the  basis  of  the  ratio  of  1  to  15.62  by  the  crea- 
tion of  a  gold  piece  of  10  florins,  weighing  5.048  grams 
fine,  with  the  maintenance  of  the  suspension  of  the 
coinage  of  silver. 

1876. — Great  fluctuations  in  the  price  of  silver,  which 
declined  to  46%d.,  representing  the  ratio  of  1  to  20.172, 
in  July.  Recovery  in  December  to  58%d.  Average 
price,  523/4d. 

1877. — Coinage  of  5-franc  silver  pieces  by  Spain  con- 
tinued later,  notwithstanding  the  decline  of  silver  in  the 
market.     Silver,  54%d. 

1877. — Replacing  of  the  double  standard  in  Finland 
by  that  of  gold  on  the  basis  of  the  mark  or  franc. 

1878. — Act  of  United  States  Congress  providing  for 
the  purchase,  from  time  to  time,  of  silver  bullion,  at  the 
market  price  thereof,  of  not  less  than  $2,000,000  worth 
per  month  as  a  minimum,  nor  more  than  $4,000,000 
worth  per  month  as  a  maximum,  and  its  coinage  as 
fast  as  purchased  into  silver  dollars  of  4121/2  grains. 
The  coinage  of  silver  on  private  account  prohibited. 
Silver,  52  9-1 6d. 

1878. — Meeting  of  the  first  international  monetary 
conference  in  Paris.  Prolongation  of  the  Latin  Union 
to  January  1,  1886.  ' 

1879. — Suspension  of  the  sales  of  silver  by  Germany. 
Silver,  51i4d. 


MONETARY  EVENTS  SINCE  1786.  327 

1881. — Second  international  monetary  conference  in 
Paris.     Silver,  51  ll-16d. 

1885. — Introduction  of  the  double  standard  in  Egypt. 
Silver,  483^d. 

1885, — Prolongation  of  the  Latin  Union  to  January 
1,  1891. 

1886. — Great  decline  in  the  price  of  silver,  which  fell 
in  August  to  42d.,  representing  a  ratio  of  1  to  22.5,  and 
recovery  in  December  to  46d.  Modification  of  the  coin- 
age of  gold  and  silver  pieces  in  Russia.    Silver,  45%d. 

1887. — Retirement  of  the  trade  dollars  by  the  govern- 
ment of  the  United  States  in  February.  Demonetiza- 
tion of  the  Spanish  piasters,  known  as  Ferdinand  Caro- 
lus,  whose  reimbursement  at  the  rate  of  5  pesetas  ended 
on  March  11.  New  decline  of  silver  in  March  to  44d., 
representing  the  ratio  of  1  to  21.43.     Silver,  44%d. 

1890. — United  States:  repeal  of  the  act  of  February 
28,  1878,  commonly  known  as  the  Bland- Allison  law, 
and  substitution  of  authority  for  purchase  of  4,500,000 
fine  ounces  of  silver  each  month,  to  be  paid  for  by  issue 
of  treasury  notes  payable  in  coin.  (Act  of  July  14, 
1890.)  Demonetization  of  25,000,000  lei  in  pieces  of 
5  lei  in  Roumania  in  consequence  of  the  introduction  of 
the  gold  standard  by  the  law  of  October  27.  Silver, 
47  ll-16d. 

1891. — Introduction  of  the  French  monetary  system 
in  Tunis  on  the  basis  of  the  gold  standard.  Coinage  of 
national  gold  coins  and  billon.    Silver,  45  l-16d. 

1892. — Replacing  of  the  silver  standard  in  Austria- 
Hungary  by  that  of  gold  by  the  law  of  August  2.  Coin- 
age of  pieces  of  20  crowns,  containing  6,098  grams 


828  MONETAEY  EVENTS  SINCE  1786. 

fine.  The  crown  equals  one-half  florm.  Meeting  of  the 
third  international  monetary  conference  at  Brussels. 
Production  of  gold  reaches  its  maximum,  varying  be- 
tween 675,000,000  and  734,000,000  francs.  Silver, 
89  13-16d. 

1893. — Suspension  of  the  coinage  of  silver  in  British 
India  and  of  French  trade  dollars  on  individual  account. 
Panic  in  the  silver  market  in  July  in  London,  when  the 
price  fell  to  30%d.,  representing  the  ratio  of  1  to  30.92. 
Repeal  of  the  purchasing  clause  of  the  act  of  July  14, 
1890,  by  the  Congress  of  the  United  States. 

1895. — Adoption  of  the  gold  standard  by  Chile. 

1895. — Russia  decides  to  coin  100,000,000  gold  rubles 
in  1896. 

1896. — Costa  Rica  adopts  the  gold  standard. 

1896. — Russia  decides  to  resume  specie  payments. 

1897. — Adoption  of  the  gold  standard  by  Russia  and 
Japan. 

1897. — Peru  suspends  the  coinage  of  silver  and  pro- 
hibits its  importation. 

1898. — Ecuador  limited  the  tender  of  silver  coins  to 
the  amount  of  10  sucres. 

1899. — India  adopted  the  gold  standard  at  the  rate  of 
15  rupees  to  1  pound  sterling  (British  standard). 

1900. — United  States  adopted  the  gold  standard. 

1900. — Ecuador  adopted  the  gold  standard. 

1901. — San  Domingo  adopted  United  States  gold  as 
standard. 

1902. — Siam  adopted  the  gold  standard. 

1903. — Colombia  adopted  gold  standard. 


/ 

MONETARY  EVENTS  SINCE  1786.  329 

190S, — Philippines  adopted  the  gold  standard. 

1904' — Panama  adopted  gold  standard. 

1905. — Mexico  adopted  the  gold  standard. 

1908, — Creation  of  a  National  Monetary  Commission 
in  the  United  States  to  report  upon  desirable  changes  in 
the  monetary  system. 

1909. — December  21,  special  report  to  Congress  by 
the  Monetary  Commission  on  the  condition  of  the  25,000 
banks  in  the  United  States. 

1913. — Approval  of  Banking  and  Currency  Act  for 
the  United  States,  establishing  a  system  of  Federal 
Reserve  Banks,  under  the  supervision  of  a  Federal  Re- 
serve Board  and  designed  to  furnish  a  more  elastic 
currency  for  commercial  purposes. 

1914^. — Establishment  of  twelve  Federal  Reserve 
Banks,  in  principal  banking  centers  of  the  United 
States,  under  the  provisions  of  the  Act  of  1913. 


**The  average  statement  required  by  a  city  bank  makes 
a  borrower  dig  down  to  the  blunt  reality.  He  may  have 
been  deluding  himself,  but  if  he  answers  the  questions 
honestly  he  often  finds  he  must  discount  his  former  esti- 
mates heavily." 


CHAPTER  XVIII. 
FOREIGN  EXCHANGE. 

BY  H.  K.  BROOKS.* 

Part  I. 

While  foreign-exchange  transactions  are  generally  re- 
garded as  being  quite  complicated,  and  there  are  some 
operations  requiring  experience  and  patient  study,  the 
system  as  a  whole  cannot  be  said  to  be  any  more  in- 
tricate than  many  of  the  problems  daily  arising  in  mer- 
cantile business. 

Comparatively  few  persons  have  a  thorough  knowl- 
edge of  the  subject  and  this  may  perhaps  be  attributed 
to  the  fact  that  until  recent  years  the  business  was  con- 
fined to  the  leading  banks  at  large  trade  centers.  Other 
banks  having  call  for  foreign  drafts,  letters  of  credit, 
or  other  foreign  paper  would  obtain  the  same  from  the 
large  banks  mentioned  or  refer  customers  to  them  direct. 

The  enormous  growth  of  our  import  business,  the  large 
increase  in  foreign  travel,  and  the  extension  of  our  trade 
to  nearly  every  country  in  the  world  so  greatly  increased 
the  volume  of  foreign  exchange  transactions  that  it  na- 
turally invited  competition,  and  today  alrtiost  every  bank 
and  financial  institution  at  a  place  of  any  importance 
is  equipped  with  the  facilities  necessary  to  meet  the  de- 
mand for  this  class  of  business  of  its  patrons. 


*  Mr.  Brooks  is  manager  of  the  Western  Financial  Department  of  tha 
American  Express  Company  and  the  author  of  a  work  on  Foreign  Ex- 
ehange  which  ig  widely  used  as  a  text  book  on  the  subject. 

831 


332  FOREIGN  EXCHANGE. 

Foreign  Depaxtments  Supersede  Brokers. 

American  merchants  who  formerly  imported  goods 
from  foreign  countries  through  brokers  at  seaport  cities 
now  have  foreign  departments  for  the  transaction  of 
the  business  direct.  Our  manufacturers,  who  formerly 
did  not  think  of  looking  beyond  the  limits  of  this  coun- 
try for  a  market  for  their  goods,  have  learned,  through 
a  better  knowledge  of  the  conditions,  that  they  can  suc- 
cessfully compete  with  foreign  manufacturers.  Our  war 
with  Spain  is  said  to  have  opened  the  eyes  of  our  manu- 
facturers to  the  fact  that  there  was  a  vast  population 
outside  of  the  United  States  who  were  dependent  for 
many  commodities  upon  countries  which  were  in  no  bet- 
ter position,  geographically  or  otherwise,  to  supply  their 
needs;  and  if  we  judge  from  the  large  increase  in  our  ex- 
ports since  the  war,  there  was,  no  doubt,  some  foundation 
for  the  statement. 

An  Opportunity  for  Students. 

In  an  article  published  in  one  of  the  leading  financial 
papers — The  New  York  Financier — ^it  was  stated  that 
the  demand  among  bankers  and  large  mercantile  houses 
for  young  men  having  a  general  knowledge  of  foreign 
exchange  and  foreign  shipping  very  greatly  exceeds  the 
supply;  that  students  fitting  themselves  for  mercantile 
hf  e  should  devote  as  much  study  as  possible  to  this 
branch,  since  it  would  be  a  very  valuable  acquisition  to 
their  fitness  for  the  present  commercial  business,  and  at 
the  same  time  insure  a  higher  appreciation  and  greater 
salary  for  their  services  than  is  usually  paid  for  other 
branches  of  either  mercantile  or  banking  business. 


rOEEIGN  EXCHANGE.  388 

What  Foreign  Exchange  Is. 

Foreign  exchange  is  a  system  by  which  commercial 
nations  discharge  their  debts  to  each  other.  This  indebted- 
ness may  represent  the  value  of  commodities  exported  to 
or  imported  from  other  countries,  money  borrowed, 
loaned,  or  invested  abroad,  and  the  interest  or  profits  on 
such  funds ;  the  cost  for  transportation  of  goods  and  the 
commissions  for  service;  the  expense  incurred  in  travel- 
ing in  foreign  countries ;  in  fact,  any  transactions  which 
involve  the  remitting  of  money,  or  anything  represent- 
ing money,  from  one  country  to  another.  These  debts 
have  to  be  paid,  either  with  cash  or  something  equally 
satisfactory  to  the  creditors.  The  cost  of  transmitting 
gold  or  currency,  and  the  risk  attending  the  same,  while 
sometimes  resorted  to,  are  generally  considered  too  great, 
and  it  is  to  avoid  this  risk  and  expense  that  the  system 
of  exchanging  debts  through  the  medium  of  commercial 
paper  is  adopted. 

Magnitude  of  Foreign  Trade. 

One  can  hardly  appreciate  the  magnitude  of  the  busi- 
ness between  the  United  States  and  foreign  countries 
which,  directly  or  indirectly,  is  transacted  through  the 
medium  of  the  system  we  term  "foreign  exchange,"  with- 
out resorting  to  actual  data  in  the  shape  of  figures,  and 
we  find  these  figures  so  large  as  to  be  almost  incompre- 
hensible. 

For  the  twelve  months  ending  June  30, 1908,  the  value 
of  the  goods  or  commodities  exported  from  this  coun- 
try to  other  coimtries  amounted  to  $1,860,773,346,  and 
during  the  same  period  the  United  States  imported  from 


384.  FOREIGN' EXCHANGE. 

other  countries  goods  to  the  value  of  $1,191,341,792, 
making  a  total  of  exports  and  imports  during  the  fiscal 
year  1908  of  $3,055,115,138— a  sum  which,  if  the  $1 
bills  were  fastened  together  at  their  ends,  would  make  a 
band  nearly  350,000  miles  long. 

The  value  of  the  goods  we  exported  exceeded  the  value 
of  those  imported  by  $666,431,554,  which  amount  of 
credit  in  our  favor  would,  had  there  been  no  other  tran- 
sactions to  offset  it,  have  to  be  remitted  to  us  from  the 
various  foreign  countries.  But  against  this  credit  in 
our  favor  foreign  countries  charged  up  to  us  the  amount 
paid  out  on  letters  of  credit  used  by  our  people  to  meet 
expenses  in  travel  abroad — balance  due  on  loans  made  by 
our  capitalists  to  float  large  enterprises,  such  as  railroad 
consolidations,  etc.,  so  that,  notwithstanding  there  was 
a  large  balance  due  us  in  the  difference  between  the 
value  of  the  goods  we  sold  to,  and  those  we  purchased 
from  foreign  countries,  it  was  partially  offset  by  other 
transactions,  so  that  in  fact,  during  the  year  1908  we 
imported  only  $75,904,397  more  gold  than  we  exported. 
Sometimes  we  export  more  gold  than  we  import  during 
the  fiscal  year.  But  whether  the  balance  be  in  our  favor 
or  against  us,  the  total  amount  of  the  business  transacted 
is  practically  all  handled  through  the  medium  of  the 
system  we  call  "foreign  exchange,"  and  the  importance 
of  a  thorough  knowledge  of  the  system  in  its  various  de- 
tails is  becoming  greater  each  year. 

Knowledge  of  Monetary  Systems. 

A  knowledge  of  the  moneys  of  account,  or  monetary 
systems,  of  the  various  foreign  countries  is  one  of  the 
first  things  necessary  to  a  clear  understanding  of 
foreign-exchange  transactions. 


FOREIGN  EXCHANGE.  335 

Paper  moneys,  such  as  government  and  bank  notes 
and  certificates,  are,  as  a  rule,  intended  solely  for  circula- 
tion within  the  country  in  which  issued,  and  are  not  legal 
tender  outside  of  the  country  from  which  they  emanate. 
Of  course,  paper  money  is  often  accepted  in  small 
amounts  for  its  full  face  value  in  other  countries,  but  it 
is  always  optional  with  the  creditor  to  accept  it. 

Silver  and  minor  coins  are  also  intended  for  domestic 
use,  and  when  accepted  in  other  countries  it  is  at  their 
actual  value  rather  than  at  their  face  value.  For  illus- 
tration: The  purchasing  power  of  the  silver  dollar  of 
the  United  States  within  this  country  is  as  great  for 
small  sums  as  that  of  the  gold  dollar,  but  in  other  coun- 
tries it  would  be  accepted  only  for  its  bullion  value.  The 
Mexican  dollar,  which  passes  for  its  face  value  in  Mexi- 
co, is  worth  less  than  fifty  cents  in  this  country. 

The  Only  International  Money. 

Gold,  by  virtue  of  commercial  usage  and  the  laws  of 
the  various  countries  of  the  world,  may  be  said  to  be 
the  only  international  money,  and  its  purchasing  power 
is  practically  the  same  all  over  the  civilized  world.  But 
it  must  be  remembered  that  the  value  of  gold  coins  is 
not  always  as  expressed  on  their  face.  In  large  inter- 
national transactions  the  weight  of  the  mass  is  regarded, 
and  not  the  number  of  pieces,  and  their  value  depends 
upon  the  weight  and  fineness.  By  "fineness"  is  meant 
pure  metal.  Nearly  all  coins  contain  alloy,  or  inferior 
metal  which  is  added  to  increase  their  durability. 

The  value  or  price  of  the  gold  money  of  account  of 
commercial  countries  is  determined  by  the  weight  and 
fineness  of  the  metal  contained  therein,  which  weight  and 


336  FOREIGN  EXCHANGE. 

fineness  are  established  by  the  mint  laws  of  the  country- 
issuing  the  money.  It  is  therefore  essential  that  the 
standard  of  weight  by  which  the  various  moneys  of  ac- 
count are  established  shall  be  unvarying  and  have  the 
highest  legal  sanction ;  otherwise  there  could  be  no  stabil- 
ity of  values  and  no  such  thing  as  accurate  deductions 
of  pars  of  exchange.  Gold  is  the  only  commodity  in 
the  world  the  value  of  which  is  established  by  law. 

The  price  of  gold  cannot  be  affected  either  by  an 
abundance  or  scarcity  of  the  supply.  No  matter  how 
large 'the  supply,  our  mints,  or  the  Bank  of  England, 
will  buy  it  at  the  price  established  by  law ;  and  although 
there  is  no  international  agreement  to  maintain  the  price, 
the  fact  that  gold  is  accepted  by  the  chief  commercial 
nations  as  the  one  universal  measure  of  values,  operates 
to  prevent  any  attempt  to  change  its  valuation.  The 
price  of  diamonds,  which  are  more  valuable  than  gold, 
is  affected  by  the  supply  and  demand.  Silver,  used  ex- 
tensively as  money,  fluctuates  in  price  like  any  commod- 
ity, the  supply  and  demand  governing  its  value. 

How  Gold  Shipments  Are  Handled. 

As  gold  shipments  between  the  United  States  and  for- 
eign countries,  particularly  Europe,  are  an  important 
factor  in  foreign-exchange  transactions,  it  is  well  to 
learn  how  they  are  handled  and  the  expense  attending 
them. 

Whether  in  coined  pieces  or  bars  (bullion) ,  the  gold 
is  packed  in  strong  kegs  or  boxes,  securely  strapped  with 
hoop  iron,  and  carefully  sealed  with  private  seals;  the 
latter  to  discover  if  tampered  with  en  route.     Space  is 


FOREIGN  EXCHANGE.  337 

chartered  from  the  steamship  company,  as  in  the  case  of 
merchandise,  although  nearly  all  large  fast  steamers 
have  rooms  especially  constructed  for  such  valuable 
cargo.  At  a  cost  of  3/16  of  1  per  cent,  or  $1,875  for 
each  million  dollars  in  value,  the  shipper  has  the  gold  in- 
sured against  loss.  The  steamship  comp^^ny  charges  for 
carrying  the  shipment  as  freight  a  rate  of  about  %  per 
cent  of  its  value,  or  about  $1,250  for  each  million  dollars. 
As  an  extra  safeguard  in  case  of  large  shipments,  the 
steamship  company  details  special  armed  men  to  guard 
the  room  day  and  night,  and  sometimes  the  shipper  em- 
ploys special  detectives  in  citizen's  clothes  to  watch  the 
passengers  on  the  trip,  since  it  is  generally  known  several 
days  in  advance  when  large  shipments  of  gold  are  to  be 
made. 

Commercial  Bars  of  Grold. 
In  accordance  with  the  United  States  Mint  regula- 
tions, a  charge  of  four  cents  per  $100  is  made  for  what 
are  known  as  commercial  bars  of  gold,  which  are  from 
990  to  997  thousandths  fine.  The  shipper  has  to  pay 
for  these  bars  with  gold  coin,  which  is  obtainable  without 
charge  at  the  Subtreasury  in  exchange  for  gold  certifi- 
cates or  for  legal-tender  notes.  There  is  no  restriction 
upon  the  withdrawals  of  gold  from  the  Subtreasury 
for  export,  and  the  shipper  has  the  option  of  taking 
coined  pieces,  if  he  prefers,  but  the  loss  by  abrasion  of 
coined  pieces  practically  equals  the  cost  of  4  cents  per 
$100  charged  by  the  mint  for  commercial  bars,  which 
are  put  up  in  that  shape  to  induce  exporters  to  take 
bars  instead  of  coined  pieces,  and  thus  save  the  govern- 
ment the  cost  of  coinage  as  well  as  the  transportation 
of  the  bullion  to  the  mint. 

I.B.L.  Vol.  4—22 


388  FOREIGN  EXCHANGE. 

*  *  Money  of  Account.  * ' 

It  is  not  necessary  to  recall  here  the  names  and  de- 
nominations of  all  the  coins  or  money  used  in  the  various 
foreign  countries.  I  shall  simply  give  the  money  of 
account  of  the  principal  countries.  By  "money  of  ac- 
count" we  mean  the  kind  of  mon^y  in  which  the  people 
keep  their  accounts,  as,  for  example,  we  keep  our  ac- 
counts in  dollars  and  cents. 

Commencing  with  North  America,  we  have,  in  addi- 
tion to  the  United  States,  Canada,  Mexico,  Central 
America,  and  we  will  include  the  West  Indies. 

Canada. — Notwithstanding  that  Canada  is  a  British 
colony,  its  trade  relations  with  the  United  States  were 
too  important  to  admit  of  the  adoption  of  the  complica- 
ted British  monetary  system,  and  the  accounts  are  kept 
in  dollars  and  cents  as  in  the  United  States.  The  Uni- 
ted States  "gold  eagle"  ($10)  and  the  British  "pound" 
or  ^'sovereign"  are  legal  tender  for  all  amounts. 

Mexico. — Mexico's  money  of  account  is  the  peso,  or 
dollar,  of  100  centavos,  or  cents — ^worth  40  to  50  cents 
in  our  money.  Being  one  of  the  chief  silver-producing 
countries  of  the  world,  the  greater  part  of  its  coinage  is 
exported  to  China,  the  Philippines,  and  Central  and 
South  America,  in  which  countries  the  Mexican  peso,  or 
dollar  is  the  favorite  coin. 

Central  America. — The  Central  American  states  all 
have  for  their  unit  of  money  the  peso  of  100  centavos — 
not  exactly  like  the  Mexican  peso,  but  more  like  the 
peso  of  the  South  American  States,  which  is  similar  to 
the  French  system-^their  unit  being  equal  to  about  5 
francs. 


FOEEIGN  EXCHANGE.  339 

West  Indies. — There  are  many  islands  comprising  the 
group  known  as  the  West  Indies.  Porto  Rico  is  now 
owned  by  the  United  States,  and  Cuba  was  until  recently 
practically  controlled  by  us.  In  both  islands  efforts  are 
being  made  to  supplant  the  Spanish  peseta  with  the 
American  dollar  as  the  money  of  account.  Most  of  the 
other  islands  are  possessions  or  colonies  of  European 
countries,  and  as  a  rule  keep  their  accounts  in  the  money 
of  their  mother-country. 

South  America. — In  South  America,  Uruguay,  Para- 
guay, the  Argentine  Republic,  Colombia,  and  Chili  use 
the  peso  of  100  centavos,  as  in  Central  America.  Brazil 
uses  the  milreis  of  1,000  reis;  Peru,  the  sol  of  10  dineros, 
each  dinero  being  equal  to  10  centavos,  or  cents;  BoUvia 
calls  its  unit  the  boliviano  of  100  centavos,  and  Ecuador, 
the  Sucre  of  100  centavos.  The  value  of  their  units  in 
our  money  fluctuates,  but  is  approximately  50  cents. 

In  drawing  drafts  on  Central  and  South  America, 
and  to  some  extent  on  Mexico,  they  are  for  United 
States  dollars  payable  in  New  York,  which  are,  of  course, 
cashed  in  the  money  of  the  country  where  payable,  at 
the  current  rate  of  exchange  on  New  York. 

Africa. — In  Africa,  Egypt's  money  of  account  is  the 
Egyptian  pound  of  100  piastres,  which,  although  of 
greater  value  intrinsically,  is  worth  less  commercially 
than  the  British  pound  sterhng.  Algeria  is  a  French 
colony  and  uses  the  French  system ;  and  the  same  is  true 
of  Madagascar,  the  third  largest  island  in  the  world. 
Cape  Colony,  Natal,  the  Transvaal,  -Orange  River  Col- 
ony, Sierra  Leone,  and  Zanzibar  are  British  colonies  and 
use  the  English  pound  sterling  as  their  unit. 


340  FOREIGN  EXCHANGE. 

Oceanica. — In  Oceanica,  the  islands  of  Australia,  New 
Zealand,  Tasmania,  and  a  portion  of  Borneo  use  the 
British  pound  sterling  by  reason  of  being  British  col- 
ony, Sierra  Leone,  and  Zanzibar  are  British  colonies  and 
use  the  gulden  or  guilder. 

Japan. — Japan's  money  of  account  is  the  yen  of  100 
sen — which  formerly  was  worth  about  $1,  but  in  1898 
its  value  was  reduced  to  about  50  cents. 

Philippine  Islands. — In  the  Philippines,  although  now 
possessions  of  the  United  States,  preference  is  given  to 
the  Mexican  dollar  as  formerly,  which  is  worth  in  our 
money  from  45  to  50  cents,  according  to  the  market 
price  for  silver. 

India. — British  India,  with  its  population  of  nearly 
240,000,000— nearly  three  times  that  of  the  United 
States — has  for  its  money  of  account  the  rupee  of  16 
annas,  the  anna  being  equal  to  4  pice  and  1  pice  equal  to 
3  pie — not  "the  kind  of  pie  our  mothers  used  to  make." 
The  value  of  the  rupee  in  our  money  is  about  33  cents. 
India,  being  a  very  poor  country,  uses  coins  of  very- 
small  value,  the  smallest  coin  (the  pie)  being  worth 
about  %  cent  in  our  money. 

Hong  Kong. — Hong  Kong  is  a  small  island  just  off 
the  coast  of  China.  Victoria,  the  capital,  and  practically 
the  only  place  there,  has  a  population  of  nearly  200,000. 
Most  of  the  trade  of  China  with  the  rest  of  the  world 
is  done  through  Victoria,  or,  as  we  know  it  best.  Hong 
Kong.  The  money  of  account  of  Hong  Kong  is  the 
dollar  of  100  cents,  but,  as  in  other  oriental  countries, 
the  Mexican  doUar  is  preferred  to  the  local  currency. 


FOREIGN  EXCHANGE.  341 

China. — China  has  several  kinds  of  money — the  dol- 
lar of  100  cents;  also  a  silver  coin  called  the  tael.  The 
latter  varies  in  value  according  to  the  locality  and  the 
price  of  silver  in  London.  But  the  Mexican  dollars 
constitute  the  principal  circulating  medium.  In  fixing 
the  valuation  of  the  Haikwan  tael  for  the  purpose  of 
adjusting  the  Chinese  indemnity,  resulting  from  the  war 
after  the  Boxer  rebelHon  there,  the  plenipotentiaries 
made  the  equivalent  in  American  money  74  2/10  cents. 

Like  India,  China  is  a  very  poor  country,  and  the 
coins  most  extensively  used  are  of  very  small  value.  They 
have  a  coin  called  "cash,"  about  the  size  of  our  silver 
quarter  (25-cent  piece)  made  of  copper  and  zinc,  with 
a  square  hole  in  the  center.  One  thousand  of  these  are 
issued  on  a  string — ^that's  what  the  hole  is  for — the  lot 
being  equivalent  to  about  $1  in  our  money,  or  1/10  of  a 
cent  each.  ^ 

European  Moneys. 

I  have  now  given  a  general  idea  of  the  kinds  of  money 
in  use  in  the  countries  of  North  and  South  America, 
Asia,  Africa,  and  the  principal  islands  of  the  Atlantic 
and  Pacific  oceans.  We  now  come  to  Europe,  with 
which  our  financial  and  trade  relations  are  of  more  im- 
portance than  all  the  others  combined. 

France,  Belgium,  Switzerland,  Italy,  Greece,  Spain, 
Rumania,  Servia,  Bulgaria,  Finland,  and  Austria-  Hun- 
gary have  the  same,  or  very  similar,  monetary  systems, 
the  first  five  countries  named  comprising  what  is  known 
as  the  "Latin  Union  countries" —  a  union  formed  for 
the  adoption  of  a  uniform  monetary  system.  The  other 
countries  adopted  the  same  system,  but  are  not  members 
of  the  union. 


342'  FOREIGN  EXCHANGE. 

France,  Belgium,  and  Switzerland  call  their  unit  the 
franc,  which  is  divided  into  100  centimes.  Italy  calls 
the  franc,  or  unit,  the  lira  of  100  centesimi.  Greece  uses 
the  unit  named  dracma  of  100  lepta;  Spain  the  peseta  of 
100  centimos ;  Rumania,  the  lei  of  100  bani ;  Servia,  the 
dinar  of  100  paras;  Bulgaria,  the  lew  of  100  stotinkas; 
Finland,  the  finmark  of  100  cents;  and  Austria-Hun- 
gary, the  crown,  or  krone,  of  100  heller.  All  these  units 
are  practically  the  same  as  the  franc  of  France  with  dif- 
ferent names,  their  actual  mint  valuation  (except  Aus- 
tria-Hungary) being  just  the  same,  19.3  cents. 

Germany's  money  of  account  is  the  reichsmark,  or 
mark,  as  we  call  it,  of  100  pfennige.  A  mark  is  worth 
about  24  cents  in  our  money. 

Norway,  Sweden,  and  Denmark,  known  as  the  Scandi- 
navian countries,  have  for  their  unit  the  krone,  or  crown, 
of  100  ores,  its  value  in  our  money  being  about  27  cents. 

Holland  has  the  gulden  or  guilder  of  100  cents,  worth 
about  40  cents  in  our  money. 

Russia  uses  for  its  unit,  the  ruble  of  100  kopecks 
worth  about  52  cents  in  our  money. 

Portugal,  like  Brazil,  has  for  its  unit  the  milreis,  equal 
to  1,000  reis,  its  value  in  our  money  being  about  $1.08. 

The  British  System. 

Foremost  among  all  nations  of  the  earth  in  the  magni- 
tude of  its  commerce,  its  vast  colonial  possessions  and 
dependencies,  and  consequently  its  importance  as  the 
chief  financial  center.  Great  Britain  furnishes  the  most 
interesting  study  of  the  money  of  the  world.  Every 
school  child  can  tell  you  the  money  of  account  of  Great 
Britain.    To  us  it  seems  a  complicated,  cumbersome  sys- 


FOREIGN  EXCHANGE.  343 

tern.  The  pound  sterling  is  equal  to  20  shillings,  each 
shilling  being  equal  to  12  pence,  and  each  penny  equal 
to  4  farthings.  Without  exception  the  sovereign  is  the 
most  universally  recognized  coin,  and,  except  the  Egypt- 
ian pound,  it  is  the  largest  of  units  of  money.  Its  actual 
value  in  our  money  is  about  $4.87. 

"Sterling"  Exchange. 

Probably  more  foreign  exchange  is  drawn  in  sterling 
—here  and  in  other  countries  as  well — ^than  in  the  money 
of  all  other  countries  combined.  This  is  due,  however, 
to  the  fact  that  London  is  the  financial  center  of  the 
world,  and  exchange  on  that  city  is  generally  acceptable, 
if  not  preferred.  For  the  same  reason  probably  90  per 
cent,  of  all  letters  of  credit  issued  throughout  the  world 
are  drawn  in  English  money. 

The  term  "rate  of  exchange"means  the  value  or  the 
price  of  the  money  of  one  country  reckoned  in  the  money 
of  any  other  country,  the  value  being  a  fixed  rate  of  ex- 
change, the  price'  a  fluctuating  rate  of  exchange. 

The  rate  of  exchange  quoted  between  any  two  coun- 
tries is  for  drafts,  checks,  or  bills  of  exchange,  and  the 
price  includes,  besides  the  actual  equivalent  of  the  stand- 
ard coin,  some  allowance  for  interest  according  to  the 
tenor  of  the  di'aft,  and  a  premium  which  the  seller  de- 
mands for  the  economy  and  superior  conveniences  of  his 
draft  or  check  as  compared  with  a  remittance  in  currency 
or  bullion.  This  premium,  which  represents  the  fluctua- 
tion, is  more  or  less  according  to  the  amount  of  exchange 
in  the  market  for  sale  and  the  demand  for  the  same. 


344  FOREIGN  EXCHANGE. 

Two  Kinds  of  Excliaiige. 

There  are  two  kinds  of  exchange — direct  and  arbi- 
trated. Direct  is  when  between  any  two  countries ;  arbi- 
trated, when  between  two  places  in  different  countries 
through  the  medium  of  some  other  place  in  another  coun- 
try ;  or,  to  express  it  more  clearly,  the  remitting  of  money 
to  one  country  through  another  country,  or  the  buying  of 
exchange  of  one  country  through  another. 

The  occasion  for  the  arbitration  of  exchange  will  arise 
when  the  rate  of  exchange  here  direct  upon  a  country  to 
which  you  wish  to  remit  is  much  higher  than  between 
that  country  and  another  country  near  by. 

For  illustration:  Through  the  financial  columns  of  our 
daily  papers,  or  by  tabled  information  direct,  the  rate 
for  a  check  in  London  on  Paris  or  Berlin,  or  vice  versa, 
is  furnished.  It  generally  reads,  for  example,  this  way: 
"Exchange  on  Paris  F.  25.12;  exchange  on  Berlin  M. 
20.42."  This  signifies  that  you  can  buy  in  London,  for 
instance,  a  check  payable  in  Paris  at  the  rate  of  25  francs 
12  centimes  per  pound  sterling,  or  on  Berlin  at  the  rate 
of  20  marks  42  pfennige  per  pound  sterhng.  There- 
fore, if  you  had  occasion  to  remit  a  large  sum  to,  say, 
Berhn,  and  you  found  you  could  buy  a  check  on  London 
and  have  the  amount  remitted  from  London  to  Berlin 
cheaper  than  you  could  remit  to  Berlin  direct,  the  tran- 
saction would  be  termed  "arbitration  of  exchange."  All 
large  banking  houses  and  jobbers  of  foreign  exchange 
watch  the  quotations  on  exchange  between  countries  very 
closely,  and  always  avail  themselves  of  any  advantage  to 
be  gained  by  remitting  to  one  country  through  another. 


FOREIGN  EXCHANGE.  345 

The  Rate  of  Exchange. 

The  fluctuation  in  the  price  of  exchange,  or,  as  it  is 
termed,  "the  rate  of  exchange,*^  is  due  to  a  number  of 
causes.  If  the  value  of  the  goods  we  exported  greatly 
exceeded  the  value  of  the  goods  we  imported  during  a 
certain  period,  the  large  balance  due  us  from  other  coun- 
tries would,  if  there  were  no  other  international  trans- 
actions to  offset  them,  cause  the  price  of  exchange  here 
to  be  lower,  for  the  reason  that  there  would  be  less  de- 
mand for  remittance  to  foreign  countries,  since  it  is  al- 
ways the  difference  between  the  debits  and  credits  that  is 
remitted.  On  the  other  hand,  if  we  owed  foreign  coun- 
tries a  much  greater  amount  than  they  owed  us,  exchange 
here  would  be  higher  by  reason  of  increased  demand 
for  it. 

But  it  is  not  alone  our  foreign  conmiercial  trade  that 
regulates  the  price  of  exchange.  The  monetary  condi- 
tions here  and  abroad  may  entirely  offset  other  condi- 
tions. 

When  the  loaning  rate  for  money  here  is  high,  capi- 
talists and  bankers  will  loan  their  money  here,  instead 
of  investing  in  foreign  commercial  bills,  which  causes 
less  demand  for  bills,  hence  lower  rates.  If  rates  for 
money  abroad  are  high,  there  will  be  a  greater  demand 
for  commercial  bills  or  other  exchange  on  foreign  coun- 
tries, for  the  purpose  of  getting  their  money  to  those 
countries  to  take  advantage  of  such  high  rates,  thereby 
causing  higher  rates.  If  the  rates  for  money  abroad  are 
lower  than  here,  our  capitalists  and  bankers  would  borrow 
money  in  their  markets  for  investment  here,  thus  in- 
creasing our  indebtedness  to  foreign  countries,  and  when 


346  FOREIGN  EXCHANGE. 

such  loans  became  due  there  would  be  an  increased  de- 
mand for  exchange  to  pay  these,  resulting  in  higher 
rates. 

Effect  of  Discount  Rates. 

The  discount  rates  at  London,  Paris,  Berlin,  and  other 
European  centers  very  materially  affect  the  buying  and 
selling  price  for  commercial  bills  drawn  against  commod- 
ities exported.  These  discount  rates  are  the  rate  per 
cent  at  which  commercial  paper  of  the  different  classes 
may  be  discounted — that  is,  the  allowance  made  for  cash- 
ing or  taking  up  the  paper  before  maturity  or  before 
due  and  payable.  These  discount  rates  fluctuate  accord- 
ing to  the  conditions  prevailing,  as  does  the  rate  of  ex- 
change. When  discount  rates  abroad  are  high,  the  rates 
for  commercial  biUs  here  will  be  lower,  and  when  low 
abroad,  the  rate  for  commercial  bills  here  will  be  higher. 

Under  normal  conditions,  the  rates  for  foreign  ex- 
change fluctuate  between  what  are  termed  gold-export- 
ing or  gold-importing  points,  which  means  the  actual 
cost' of  the  gold  plus  the  cost  of  transporting  it  from  one 
point  to  another. 

For  example:  If  you  wished  to  remit,  say,  to  London 
the  equivalent  of  £50,000  (or  approximately  $250,000) , 
and  you  found  that  the  cost  of  the  gold  coin  or  bullion 
and  the  expense  of  freight,  insurance,  commissions,  etc., 
would  be  considerably  less  than  the  cost  of  a  draft  or 
check  for  the  amount  on  London,  then  you  would  ship 
gold  in  preference.  If  the  cost  were  equal  or  greater 
for  shipping  gold,  then  you  would  remit  by  check,  as 
it  would  be  more  convenient  and  less  risk.  Therefore 
the  rates  naturally  do  not  go  much  above  or  much  below 
the  gold  points. 


FOREIGN  EXCHANGE.  847 

When  the  rate  for  demand  sterling  exchange  gets 
down  to,  say,  $4.83%  to  $4.84  per  pound,  it  is  cheaper 
to  import  gold.  If  such  exchange  reaches  as  high  as 
$4.8414  to  $4.88%  per  pound,  then  gold  can  be  exported 
equally  cheaply. 

But  notwithstanding  these  various  conditions  which 
affect  the  market  price  for  foreign  exchange,  it  is  the 
supply  and  demand  that  regulate  the  price,  as  in  the 
case  of  wheat,  corn,  or  any  commodity. 

Par  of  Exchange. 

"Par  of  exchange"  means  equal  of  exchange.  There 
is  a  "mint  par  of  exchange,"  and  also  what  might  be 
termed  a ''commercial  par  of  exchange." 

The  mint  par  of  exchange  between  the  United  States 
and  foreign  countries  is  the  actual  value  in  our  money 
of  the  pure  metal  contained  in  the  coins  representing  the 
units  of  money  of  the  various  countries.  The  Director 
of  the  United  States  Mint  is  required  at  stated  periods 
in  each  year  to  proclaim  the  values  of  these  coins  or 
units  in  our  money  for  the  purpose  of  computing  the 
worth  of  importations  of  goods  and  also  the  amount  of 
customs  duties  assessable  thereon.  The  value  of  gold 
coins,  as  fixed  by  the  Director  of  the  Mint,  rarely  ever 
changes,  since  the  weight  and  fineness  of  the  gold  units 
of  countries  are  fixed  by  law — in  the  United  States  by 
act  of  Congress,  in  Great  Britain  by  act  of  Parliament. 

The  mint  par  of  exchange  of  the  English  pound  or 
sovereign  in  our  money  is  $4.8665 ;  of  the  French  franc 
and  the  franc  of  the  Latin  Union  countries,  19.3  cents; 
of  the  German  mark,  23.8  cents;  of  the  Scandinavian 


348  FOEEIGN  EXCHANGE. 

krone,  26.8  cents ;  and  of  the  Holland  gulden  or  guilder, 
40.2  cents;  and  for  many  years  it  has  been  the  same. 
While  these  values  as  furnished  are  not  exactly  correct, 
they  are  sufficiently  accurate  to  serve  the  purpose  in- 
tended, and  are  accepted  for  all  computations  at  the 
custom  houses. 

To  find  the  Par  of  Exchange. — In  order  to  determine 
the  actual  mint  par  of  exchange  between  any  two  coun- 
tries, it  is  necessary  only  to  divide  the  weight  of  the 
pure  gold  in  the  gold  unit  of  the  one  country  by  the 
weight  of  the  pure  gold  in  the  coin  of  the  other  country. 
The  mint  par  of  exchange  between  the  United  States  and 
countries  having  silver  monetary  units  is  arrived  at  in 
the  same  way,  but  as  the  price  of  silver  fluctuates,  the 
value  of  silver  coins  frequently  changes. 

As  an  illustration  of  how  the  pars  of  exchange  are 
arrived  at,  we  will  take  for  example  the  mint  par  of  ex- 
change between  the  United  States  and  Great  Britain. 
Our  gold  dollar  (which  is  our  unit  of  money  of  account) 
weighs  gross  25.8  troy  grains  and  is  9/10  fine,  1/10 
alloy  being  allowed  to  increase  its  durability,  which,  if 
deducted,  leaves  23.22  troy  grains  of  pure  gold.  The 
sovereign  contains  gross  123.274478  troy  grains  and  is 
11/12  fine,  which  leaves  the  pure  gold  in  the  sovereign 
118.001603  troy  grains,  which,  if  divided  by  23.22,  the 
pure  gold  in  the  United  States  dollar,  gives  $4.866560, 
the  mint  par  of  exchange. 

If  you  divide  the  value  of  the  sovereign  ($4.8665) 
by  20  (there  being  20  shilHngs  to  the  pound),  it  will 
give  you  the  actual  value  of  the  shilling  in  our  money,  or 
if  you  divide  it  by  240,  the  number  of  pence  to  the  pound, 


FOREIGN  EXCHANGE.  349 

it  will  give  you  the  value  of  the  penny  in  our  money  (a 
fraction  over  2  cents) . 

Commercial  Par  of  Exchange. — Now,  as  to  the  com- 
mercial par  of  exchange,  if  you  add  to  the  mint  par  of 
exchange  between  two  countries  the  cost  of  transferring 
the  coin  or  bullion,  which  involves  freight  charges,  in- 
surance, interest,  commissions,  and  sometimes  discounts, 
you  will  arrive  at  what  would  be  termed,  under  normal 
conditions,  the  "commercial  par  of  exchange,"  or  the 
amount  necessary  to  discharge  a  debt  of  a  merchant  in 
one  country  to  a  merchant  in  another  country. 

In  further  illustration  of  the  commercial  par  of  ex- 
change, if  the  United  States  owed  England  exactly  the 
same  amount  that  England  owed  us,  the  debts  between 
these  two  countries  could  be  paid  without  the  interven- 
tion of  money,  and  the  commercial  price  of  exchange 
would  be  at  par.  If,  however,  we  owed  England  a 
greater  amount  than  it  owed  us,  exchange  here  would 
be  higher,  and  in  England  lower,  and  vice  versa.  In 
other  words,  exchange  in  the  United  States  would  be 
at  a  premium,  and  in  England  at  a  discount,  the  prem- 
ium in  one  case  being  about  equal  to  the  discount  in  the 
other. 

Quotations  of  Rates. 

Quotations  for  foreign  exchange,  such  as  checks, 
drafts,  commercial  bills,  etc.,  are  rarely  understood  ex- 
cept by  those  familiar  with  the  business.  In  quoting 
the  rate  of  exchange  for  drafts,  checks,  etc.,  on  countries 
other  than  France,  Germany,  and  sometimes  Italy,  the 
rate  quoted  is  per  single  unit,  that  is,  so  much  in  our 
money  per  pound  sterling  on  England;  krone  on  Nor- 
way, Sweden,  and  Denmark;  ruble  on  Russia,  etc. 


850  FOILEIGN  EXCHANGE. 


Exchange  on  France  and  Germany,  when  quoted  by 
dealers  at  smaller  places,  would  be  the  same — so  much 
per  single  franc  or  mark ;  but  in  the  larger  cities  it  js 
the  custom,  when  quoting  rates  for  francs,  to  quote  the 
number  of  francs  and  centimes  that  will  be  allowed  per 
$1,  as,  for  example,  5.15% — meaning  that  for  each  $1 
you  would  be  allowed  5  francs  15%  centimes. 

On  Germany  the  quotation  would  be  for  4  marks  in- 
stead of  1 ;  for  example,  95  5/16 — ^meaning  that  for  each 
4  marks  you  would  have  to  pay  95  5/16  cents. 

The  allowance  of  %  of  a  centime  per  $1,  considering 
that  one  whole  centime  is  worth  only  1-5  of  a  cent  in  our 
money,  and  a  fraction  like  5-16  of  a  cent  in  our  money 
on  4  marks,  no  doubt  seems  to  most  people  like  a  very 
small  item,  but  on  a  transaction  of  100,000  francs  (about 
$19,400  in  our  money)  %  of  a  centime  per  dollar  would 
make  a  difference  of  over  $28,  and  5-16  of  a  cent  per  4 
marks  on  100,000  marks  (about  $24,800)  would  be  a 
difference  of  over  $78,  or  over  $15  on  each  1-16  of  a  cent. 

Peculiarity  of  French  Quotations. 
One  peculiarity  in  the  French  quotations  is  that  the 
rate  is  always  advanced  or  lowered  by  %  of  a  centime; 
for  illustration,  the  next  lower  rate  to  5.15  would  be  5.15 
%,  then  5.I6I4,  5.16%,  5.17l/2»  ^tc.,  there  being  just 
%  between  each  quotation.  Bear  in  mind,  the  greater 
the  number  of  francs  and  centimes  allowed  per  dollar, 
the  lower  would  be  the  rate,  since,  as  the  quotation  is  per 
$1,  the  more  francs  you  would  receive  for  your  money. 
One  reason  assigned  for  this  method  of  quoting  the 
French  franc,  which  is  the  reverse  of  that  in  other  kinds 
of  exchange,  is  %  of  a  centime  is  equivalent  to  %  of  1 


FOREIGN  EXCHANGE.  351 

per  cent,  in  the  pound  sterling,  and  as  most  of  the  French 
exchange  was  formerly  covered  or  paid  through  English 
exchange,  this  method  served  a  convenience  in  figuring. 
The  other  reason,  which  is  given  by  the  "Financier"  of 
New  York,  is  that  as  there  are  5  francs  to  the  dollar,  % 
of  1  per  cent,  on  1  franc  would  call  for  %  of  1  per  cent, 
on  5  francs,  the  equivalent  of  $1. 

But  these  quotations  on  francs  by  %  of  a  centime, 
though  they  served  every  purpose  a  few  years  ago,  are 
not  now  sufficiently  close  to  meet  the  competition  of  the 
present  day  and  are  supplemented  with  fractional  quo- 
tations, such  as  5.15-%— 1.32,  or  5.15-%— 1-16,  or  5.15- 
%  plus  1-32,  etc.  These  plus  or  minus  fractions  do  not 
apply  directly  to  the  rate,  but  mean  1-32,  1-16,  3-32, 
etc.,  of  1  per  cent,  plus  or  minus  the  equivalent  amount  in 
American  money,  which  is  added  or  deducted  as  the  case 
may  be. 

In  a  publication  entitled  "Foreign  Exchange,"  issued 
by  myself,  furnishing  conversion  tables  for  foreign- 
exchange  transactions,  I  have  adopted  a  method  for  quot- 
ing on  French  exchange  that  would  do  away  with  those 
confusing  fractional  quotations,  by  supplying  conver- 
sion tables  for  francs,  the  equivalent  of  $1  by  eighths  of 
a  centime.  For  example :  instead  of  jumping  from  5.15- 
%,  which  would  be  the  next  lower  quotation,  the  tables 
in  this  book  are  for  5.15,  5.15%,  5.15%,  5.15%,  5.15- 
%,  and  then  5.15%,  which  practically  serve  the  same 
purpose,  and  avoid  the  complicated  figuring  of  the  frac- 
tions, plus  or  minus  1-32, 1-16,  or  3-32,  etc.,  of  1  per  cent 
mentioned;  and  I  look  for  its  general  adoption  in  the 
near  future. 


352  FOREIGN  EXCHANGE.  ' 

German  and  English  Quotations. 

Quotations  for  German  exchange,  where  quoted  far 
4  marks  instead  of  a  single  mark,  are  also  supplemented 
by  the  plus  or  minus  fractional  quotations;  as,  for  ex- 
ample, if  95  5-16  per  4  marks  was  thought  a  little  too 
high,  it  will  be  quoted  95  5-16  minus  1-32  of  1  per  cent., 
which  on  a  transaction  of  100,000  marks  would  make 
a  difference  of  about  $7.50. 

In  large  transactions  the  quotations  on  English  ex- 
change (which  are  generally  confined  to  eighths  of  a 
cent  per  pound)  are  often  supplemented  with  the  quo- 
tation "plus  1.00,"  which  means  $1  additional  will  be 
charged  on  each  1,000  pounds,  making  a  difference  of 
10  points  in  the  rate.  That  is,  a  quotation  of  4.87% 
plus  1.00  would  be  $4.8735,  and  it  is  not  unusual  in 
very  large  transactions  to  advance  or  lower  the  rate 
by  five  hundredths  of  a  cent  per  pound,  such  ds  4.87, 
4.8705,  4.8710,  4.8715,  etc.,  each  five  hundredths  of  a 
cent  per  pound  making  a  difference  of  $5  on  each  10,000 
pounds,  or  $250  on  a  transaction  of  500,000  pounds 
(nearly  $2,500,000  in  our  money),  often  made  by  large 
financial  institutions  in  a  single  day. 

Meaning  of  Newspaper  Quotations. 

As  an  illustration  let  us  take  a  clipping  from  the  Chi- 
cago Tribune,  quoting  the  rates  for  "foreign  exchange." 
Under  the  heading  "Foreign  Exchange  Market"  it 
starts  in  by  saying:  "Foreign  exchange  closed  steady 
at  the  following  rates."  "Steady"  means  a  demand  and 
prices  hkely  to  remain  as  they  are.  "Firm"  would  mean 
good  demand,  with  prices  tending  upward ;  "strong,"  a 


FOREIGN  EXCHANGE.  -  353 

large  demand,  with  prices  certain  to  go  higher.  "Dull" 
or  "weak"  would,  of  course,  mean  very  little  or  no  de- 
mand, with  prices  tending  lower. 

Under  the  head  of  "selling"  rates  it  gives : 

Cable  transfers,  London 5.88 

Checks,  London 4.871/2 

Checks,  Paris 5.161/4  plus  1-32 

Checks,  Berlin 0.95  7-16 

Checks  Holland 0.4014 

"Selling  rates,"  in  this  case,  mean  the  prices  that  were 
charged  customers  who  wished  to  remit  abroad. 

The  first  item,  "cable  transfers,"  is  where  amount  of 
money  desired  to  be  paid  abroad  is  deposited  here,  and 
the  bank  or  concern  with  which  you  are  transacting  the 
business  cables  its  correspondent  abroad  to  pay  the 
amount  to  the  person  at  the  address  you  designate. 
Of  course,  it  would  be  necessary  for  those  making  such 
transfers  to  have  funds  or  credit  abroad  for  such  pur- 
pose. When  it  is  desired  to  have  money  paid  at  interior 
places,  the  cablegram  will  be  sent  to  the  nearest  city  at 
which  the  bank  or  concern  here  has  funds,  and  it  will  be 
foi'warded  by  mail  there,  causing  a  delay  of  perhaps 
only  a  few  hours.  Ordinarily,  within  one  or  two  hours 
from  the  time  you  deposit  the  money  here  it  will  be  paid 
to  the  person  abroad  whom  you  designate. 

The  quotations  for  checks  London,  checks  Paris,  and 
checks  Berhn  are  the  rates  at  which  they  would  have 
sold  you  a  demand  check  or  draft  payable  at  those  partic- 
ular cities.  If  you  wanted  a  check  payable  at  some 
other  point  in  Great  Britain,  France,  or  Germany,  they 
undoubtedly  would  have  charged  you  a  higher  rate,  since 
their  balances  are  kept  only  at  principal  trade  centers, 

I.B.L.   Vol.  4—23 


854  FOREIGN  EXCHANGE. 

and  their  arrangements  for  payment  of  their  paper  at  in- 
terior or  other  points  are  that  the  bank  correspondents 
there  will  honor  their  paper  and  reimburse  themselves 
by  drawing  upon  the  trade  centers  for  the  amount  plus 
their  commission  for  cashing,  hence  adding  to  the  cost  of 
performing  the  service. 

The  next  item  is  "checks  Holland  ^O^^:-"  This  means 
they  would  charge  for  a  check  or  draft  on  any  point 
in  Holland  at  the  rate  of  40%  cents  per  gulden  or 
guilder,  the  money  of  that  country  . 

Following  the  above  there  appears  in  our  newspaper 
clipping  the  heading  "Buying  Rates,"  which  means  the 
rates  at  which  the  banks  purchased  the  various  classes  of 
commercial  paper  named.  The  quotations  are  as  fol- 
lows : 

60  days  London  bankers  ..... .,. . . , . . .  ,i i.  .4.8414 

60  days  London  documentary 4.841/^ 

3  days  Antwerp .,. . 5.181/8  less  1-32 

3  days  Hamburg 0.9514  plus  1-32 

60  days  HoUand 0.39  15-16 

The  first  quotation,  "60  days  London  Bankers 
4.84%,"  is  for  drafts  drawn  by  bankers  payable  sixty 
days  after  sight  (meaning  after  acceptance  abroad) 
against  their  account  in  a  bank  upon  which  draft  is 
drawn.  The  banker  issuing  such  draft  has  60  days  (if 
necessary)  in  which  to  place  funds  abroad  to  meet  pay- 
ment of  this  draft;  therefore  a  bank  will  often  sell  its 
sixty-day  draft  with  the  belief  that  it  will  be  able  to  pur- 
chase and  place  the  amount  abroad  to  meet  the  same  be- 
fore draft  is  due,  at  a  lower  rate  than  at  which  it  sold, 
and  thus  make  a  profit.    There  axe  other  cases  where  a 


FOREIGN  EXCHANGE.  355 

bank  will  sell  its  sixty-day  draft  on  the  market  to  obtain 
the  use  of  the  money  for  that  period. 

The  next  item,  "60  days  London  documentary  4.84%" 
is  what  is  known  as  a  foreign  commercial  bill  of  ex- 
change, which  I  will  explain  more  fully  later.  The  doc- 
uments referred  to  are  the  bills  of  lading  and  the  in- 
surance certificates,  representing  a  shipment  of  goods 
abroad.  The  draft  is  drawn  payable  sixty  days  after 
sight,  which  is  the  time  credit  extended  to  purchaser  by 
the  seller. 

The  three-day  quotations  mentioned  on  Antwerp  and 
Hamburg  are  for  drafts  payable  three  days  after  sight. 
The  custom  of  drawing  drafts  three  days  after  sight  on 
points  in  European  countries  outside  of  Great  Britain 
is  because  no  days  of  grace  are  allowed  on  the  continent 
as  in  Great  Britain,  and  the  three  days  are  granted  to 
insure  payment  being  made,  and  thus  avoid  "protest 
fees,"  which  often  are  very  exorbitant. 

The  sixty-day  Holland  bills  are  issued  and  paid  under 
practically  the  same  conditions  as  the  "sixty-day  London 
bankers"  just  mentioned,  although  drawn  against  com- 
modities exported.  They  are  what  is  termed  "clean  bills" 
by  reason  of  there  being  no  documents  attached. 

We  may  also  find  in  our  paper  the  following  items 
which  pertain  to  foreign  exchange  transactions:  Under 
the  head  of  "Money  Markets  of  the  World"  it  reads: 
"Discounts  at  London,  2%  per  cent.;  Paris,  2  7-16  per 
cent.;  Berlin,  1%  per  cent."  Foreign  discount  rates 
mean  the  rate  per  cent,  charged  or  allowed  on  drafts  dis- 
counted or  paid  before  due.  These  particular  rates  men- 
tioned apply  to  drafts  drawn  on  bankers. 


356  FOBEIGN  EXCHANGE. 

Here  is  also  another  newspaper  quotation  "Sterling 
exchange — posted  rates  4.88,  actual  rates  4.87%,  docu- 
mentary rates  4.84."  Posted,  or  nominal^  rates  are  those 
posted  daily  on  bulletins  of  leading  New  York  dealers 
in  exchange  for  use  of  the  general  public,  and  apply 
more  particularly  to  smaller  sums.  Actual  rates  are  in- 
side terms  made  to  brokers  or  large  buyers  for  large 
sums.  Documentary  rates  are  for  commercial  bills  of 
exchange. 

Before  and  After  Clearings. 

Here  is  still  another  newspaper  quotation,  which,  while 
not  applying  directly  to  foreign  exchange,  materially 
affects  its  rates  in  the  western  market:  "New  York  ex- 
change— 30  cents  discount  before  clearings,  40  cents  dis- 
count after  clearings."  The  expressions  "before"  and 
"after  clearings"  mean  before  or  after  the  meeting  of 
the  bank  clearing-house,  a  meeting  held  each  day  about 
11  a.  m.  by  representatives  of  the  different  banks  to  ex- 
change debits  and  credits  with  each  other.  "New  York 
exchange"  means  checks  payable  by  a  bank  in  New 
York.  Thirty  cents  discount  in  this  case  would  mean  that 
New  York  exchange,  in  sales  between  banks  (not  as  a 
rule  with  the  public) ,  would  be  sold  at  a  discount  of  30 
cents  for  each  $1,000.  If  New  York  exchange  were 
quoted  at  a  premium  of  30  cents,  they  would  charge  30 
cents  additional  per  $1,000.  The  reason  why  the  rates 
for  New  York  exchange  affect  the  rates  for  foreign  ex- 
change in  the  West  is  that  the  rates  in  the  West  and 
elsewhere  in  the  United  States  are  based  on — or  I  might 
say  controlled  by — the  rates  in  New  York,  because  New 
York  is  the  principal  buying  market.  Therefore  if  New 
York  exchange  here  is  at  a  discount,  on  large  transac- 


FOREIGN  EXCHANGE.  357 

tions  banks  would  sell  you  a  draft  on  London  or  other 
foreign  city  at  the  rate  of  30  cents  per  $1,000,  less  than 
you  could  buy  it  for  in  New  York ;  or,  if  at  a  premium, 
the  rate  would  be  that  much  per  $1,000  higher  than  New 
York  rates,  providing  of  course  you  paid  in  cash  or  local 
funds. 


(Sxrijmigrtinr              . 

£^^,^                            ./?«?, 

y^(§2a^Z^M£^f^SxVUl^^^k3^. 

^^ 

1  k^  ^' 

^— 4f^ 

a:%^8 

r 

(Sxjdtmtiu  for               ^-y^             ^ 

(/^^jp^^/^^.*^^y.^^>^ 

^         ,///      /^          ' 

y^ 

\ 

Foreign  Bill  of  Exchange. 


CHAPTER  XIX. 
FOREIGN  EXCHANGE. 

BY  H.  K.  BROOKS 

Part  2. 

The  basis  of  a  foreign  bill  of  exchange  is,  as  its  name 
implies,  a  commercial  transaction  of  international  char- 
acter, which  consists  in  the  purchase  of  goods  or  commo- 
dities in  one  country  for  export  to  another  country. 

The  draft  represents  the  money  value  of  the  goods 
which  is  due  the  exporter. 

The  bill  of  lading  is  the  contract  between  the  trans- 
portation company  and  the  shipper  for  carrying  of  the 
goods,  and  also  serves  as  the  order  for  their  delivery. 

The  insurance  certificate  is  the  certification  of  the 
marine  insurance  company  of  reimbursement  in  case 
goods  are  lost  by  fire  or  accident  while  en  route  on  the 
ocean. 

These  three  documents — the  draft,  bill  of  lading,  and 
insurance  certificate — constitute  what  is  termed  a  for- 
eign commercial  hill  of  exchange.  They  are  almost  in- 
variably issued  in  duplicate  for  fear  one  set  may  be  lost 
in  its  transmission  abroad  by  mail,  one  of  each  set  being 
marked  "original,"  the  other  "duplicate;"  or  sometimes 
one  of  the  drafts  will  read  "first  of  exchange,"  the 
other  "second  of  exchange." 

Foreign  commercial  bills  of  exchange  are  also  known 
as  "documentary  bills  of  exchange,"  by  reason  of  the  biU 

359 


360  FOREIGN  EXCHANGE. 

of  lading  and  insurance  certificate  accompanying  the 
draft.  It  is  customary  to  send  the  originals  of  the  three 
documents  by  first  steamers,  the  duplicates  or  seconds  by 
following  steamer.  If  the  original  set  is  lost,  the  dupli- 
cate will  serve  the  same  purpose. 

Commerce  and  Exchange. 

Trade  between  countries  may  be  said  to  be  conducted 
in  a  manner  somewhat  similar  to  that  employed  here 
between  cities  or  towns,  except  that  the  method  of  pay- 
ment or  reimbursement  to  the  shipper  necessarily  differs 
by  reason  of  greater  distance,  the  difference  in  kind  of 
money  used,  and  commercial  customs  in  the  two  coun- 
tries. To  obtain  payment  for  goods  shipped  to  a  foreign 
country  which  perhaps  would  not  arrive  at  their  destina- 
tion for  several  weeks  and  possibly  months,  according 
to  distance,  and  whether  by  fast  or  slow  steamer,  to  say 
nothing  of  the  fact  that  to  some  countries  steamers  only 
leave  our  ports  semi-monthly  or  monthly,  it  is  the  usual 
custom  of  the  shipper,  whom  we  term  the  exporter,  to 
sdl  his  commercial  bill  of  exchange  against  the  shipment 
in  advance  to  the  highest  bidder;  and  he  rarely  experi- 
ences any  difficulty  in  finding  a  ready  purchaser. 

Our  exporters,  in  competing  with  foreign  manufactur- 
ers, must  take  into  consideration  cost  of  transportation, 
insurance  on  goods,  customs  duties,  difference  in  value  of 
money,  and  the  probable  price  at  which  they  can  discount 
or  sell  their  commercial  bills  against  the  same.  Time 
credit  must  also  be  extended  to  the  buyer.  If  our  ex- 
porters had  to  wait  for  payment  until  the  maturity  of 
their  WUs,  it  would  mean  the  tying  up  of  a  large  amount 
of  capital  and  possibly  prevent  their  competing  success- 
fully. 


FOREIGN  EXCHANGE.  361 

A  Typical  Transaction. 

The  process  by  which  a  foreign  commercial  bill  of 
exchange  drawn  against  commodities  exported  is  created 
and  handled,  and  reaches  its  termination,  may  best  be 
illustrated  by  an  actual  transaction,  and  I  give  below 
exact  terms  of  a  commercial  bill  of  exchange  drawn 
against  a  shipment  of  flour  made  by  a  leading  exporter 
— flour  being  one  of  our  chief  exportable  commodities. 

The  shipment  of  flour  in  question,  destined  to  Liver- 
pool, England,  was  delivered  to  the  Soo  freight  line  at 
Minneapolis,  operating  over  the  Minneapolis,  St.  Paul  & 
Sault  Ste.  Marie  and  Canadian  Pacific  Railroads,  and 
a  through  bill  of  lading  in  dupKcate  was  obtained.  This 
through  hill  of  lading  is  a  form  of  contract,  issued  by 
special  arrangements  with  connecting  ocean  steamship 
hues,  by  the  terms  of  which  it  is  agreed,  under  conditions 
printed  thereon,  to  transport  the  shipment  through  to  the 
destination  at  the  foreign  port  (Liverpool).  It  states 
the  number  of  packages,  how  they  are  marked,  their  con- 
tents, the  particular  grade  or  brand  of  flour,  and  the 
name  and  location  of  the  party  for  whom  the  goods  are 
intended.  It  is  negotiable  only  by  indorsement  of  the 
exporter. 

Upon  presentation  of  this  evidence  of  shipment^,  a 
marine  insurance  company  has  issued  a  certificate  of  in- 
surance, under  the  terms  of  which  it  agrees  to  reimburse 
the  owner  of  the  goods  in  case  of  the  loss  of  the  ship- 
ment by  fire  or  accident  while  en  route  on  the  ocean. 
This  shipment,  as  is  the  usual  custom,  is  insured  for  about 
10  per  cent  in  excess  of  its  billed  value. 


362  FOREIGN.  EXCHANGE. 

The  exporter  then  attaches  to  these  documents  a  draft 
for  the  amount  for  which  the  flour  was  sold,  namely, 
£457  12s  lOd.  Had  his  shipment  been  destined  to  a 
point  in  Germany,  the  draft  would  have  been  drawn  in 
marks;  if  to  France,  in  francs,  and  so  on;  usually  in  the 
money  of  the  country  where  it  is  going;  but  quite  often 
it  will  be  drawn  in  English  money,  although  going  to 
some  other  country,  by  reason  of  English  exchange  be- 
ing preferred. 

In  this  case  the  exporter  agreed  to  allow  the  buyer 
sixty  days'  time  in  which  to  pay  the  draft,  after  its  pre- 
sentation. The  draft  reads  "60  days  after  sight  of  this 
first  of  exchange  (second  unpaid),  pay  to  the  order  of 
ourselves  457  pounds  12  shillings  and  10  pence,  against 

Soo  line,  through  B.  L.  No.  B.  1548,  dated ,  19 . . . , 

for  2,000  sacks  of  flour  branded  Dakota,"  and  is  signed 
^'Northwest  ConsoHdated  Milling  Co.,  by  H.  E.  Kent, 
cashier,"  who  are  termed  the  drawers.  In  the  left  corner 
it  reads:  "To  James  Corwith  &  Co.,  Liverpool,  Eng." 
They  are  the  buyers,  or,  as  we  term  them,  the  drawees. 

Now,  these  three  documents,  drawn  to  the  order  of  the 
exporters  (Northwestern  Consolidated  Milling  Co.), 
comprise  a  commercial  hill  of  exchange. 

Upon  the  same  day  that  these  documents  were  issued, 
and  practically  before  the  flour  had  started  on  its  long 
journey,  the  exporters  offered  this  bill  of  exchange  for 
sale.  It  was  sold  to  the  Security  Bank  of  Minneapolis 
(that  being  highest  bidder)  at  the  rate  of  $4.84  per 
pound,  who  in  turn  resold  it  to  the  American  Express 
Co.  at  $4.84%  per  pound.  The  indorsements  on  the 
back  of  the  draft  read : 


FOREIGN  EXCHANGE.  ,    863 

Northwestern  Consolidated  Milling  Co.,  H.  E.  Kent,  Treas- 
urer. 

Security  Bank  of  Minnesota,  Thos.  F.  Hurley,  Cashier. 

Pay  to  the  order  of  the  National  Provincial  Bank,  Liverpool. 
American  Express  Co.,  By  Jas.  F.  Fargo,  Treasurer. 

The  latter  indorsement  shows  the  papers  to  have  been 
sent  to  Liverpool  for  collection.  The  bank  at  Liverpool 
notified  Corwith  &  Co.  to  call  and  accept  the  draft,  which 
they  did,  by  writing  the  word  "accepted'*  and  the  date 
over  their  signature. 

About  fifteen  days  afterward  the  flour  arrived  by  slow 
steamer,  and,  being  in  immediate  need  of  it,  Corwith  & 
Co.,  in  order  to  obtain  the  bill  of  lading,  had  to  pay  the 
draft;  the  instructions  stamped  on  same  being:  "Sur- 
render documents  upon  payment  only." 

Now,  as  Corwith  &  Co.  paid  this  draft  forty-five  days 
before  it  was  due,  the  bank,  as  is  customary,  allowed 
them  the  prevaiHng  rate  of  discount  applicable  to  that 
class  of  bills,  which  was  2  per  cent  (or  £l  3s.  5d.) .  The 
difference,  .£456  7s.  5d.,  less  cost  of  revenue  stamps,  was 
placed  to  the  credit  of  the  American  Express  Co.  by  the 
bank  which  closed  the  transaction. 

Had  the  instructions  on  draft  read  "Surrender  docu- 
ments upon  acceptance  of  draft,"  the  bill  of  lading  would 
have  been  delivered  when  draft  was  accepted,  thus  en- 
abling Corwith  &  Co.  to  obtain  goods  at  once  and  pay 
draft  sixty  days  afterward  if  they  desired. 

The  method  used  in  determining  what  this  commer- 
cial bill  was  worth  when  buying  it  here  was  based  upon 
the  following: 

1.  What  demand  exchange  upon  Liverpool  could  be 
sold  for. 


364  •  FOREIGN  EXCHANGE. 

2.  The  cost  of  revenue  stamps  to  be  affixed  when 
draft  was  accepted  abroad. 

3.  The  interest  for  the  number  of  days  for  which 
draft  was  drawn,  plus  three  days'  grace,  at  the  rate  per 
cent  bill  could  be  discounted. 

For  illustration : 
$4f.8775     Demand  rate  on  Liverpool. 
0.00244  Cost  of  revenue  stamp  (1-20  of  1  per  cent,  of  rate 

or  1  shilling  per  100  pounds). 
$4.87506 

0.01676  Interest  63  days  2  per  cent  (disct.  rate). 
$4.85830  Parity  or  cost  per  pound  at  maturity  or  if  dis^ 
counted. 
4.84125  Rate  per  pound  at  which  purchased. 
$0.01705  Profit  per  pound. 

Or  $7.78  on  £457  12s.  lOd. 

Foundation  of  Foreign  Exchange. 

The  buying  of  foreign  commercial  bills  of  exchange 
is  the  principal  medium  of  bankers  and  foreign-exchange 
dealers  in  placing  funds  to  their  credit  in  banks  abroad 
against  which  they  issue  checks,  drafts,  letters  of  credit, 
etc.  It  is  the  foundation  of  most  of  our  foreign-ex- 
change transactions.  It  is  the  principal  source  of  profit 
in  the  business.  It  enables  manufacturers  to  sell  their 
goods  abroad  for  cash  in  advance. 

Foreign  bills  of  exchange  vary  as  to  conditions  of 
payments  abroad.  If  conditions  of  sale  between  buyer 
and  seller  of  the  goods  were  that  goods  were  to  be  paid 
for  upon  delivery,  the  instructions  accompanying  the  bill 
would  say  "documents  for  payment"  (expressed  d.p.), 
meaning  not  to  deliver  the  bill  of  lading  (which  would 
enable  drawee  to  get  goods)  until  draft  had  been  paid. 


FOREIGN  EXCHANGE.  365 

If  instructions  said  "documents  for  acceptance"  (ex- 
pressed d.  a.),  it  would  mean  that  bill  of  lading  could 
be  delivered  when  draft  was  accepted,  thus  enabling 
drawee  to  obtain  goods  at  once  and  pay  draft  any  time 
within  sixty-three  days  (if  a  sixty-day  bill). 

Buying  Commercial  Bills. 

The  buying  of  commercial  bills  of  exchange  can  be 
safely  undertaken  only  by  those  thoroughly  familiar  with 
that  business.  It  is  practically  equivalent  to  loaning 
money  upon  security  you  have  not  seen.  If  the  drawee 
of  the  bill  has  unquestionable  responsibility,  that  of 
course  eliminates  the  principal  risk  of  loss;  but  if  great 
care  is  not  exercised  in  examining  bills  purchased,  a 
slight  imperfection  or  error  might  cause  a  long  delay  in 
adjusting  the  error,  thereby  causing  loss  of  interest.  If 
through  a  misunderstanding  or  for  other  cause  goods  are 
not  accepted,  they  have  to  be  sold  to  the  best  advantage 
for  the  account  of  the  owner  of  the  bill,  and  the  proceeds 
of  the  sale  are  applied  toward  payment  of  the  draft.  If 
there  is  a  deficiency,  it  is  collected  of  the  drawer  of  the  bill 
— the  exporter. 

The  buyer  of  commercial  bills  should  know  the  market 
value  of  the  goods  exported  and  the  financial  standing 
of  the  drawer  or  exporter;  should  see  that  the  bill  of  lad- 
ing is  correctly  dated,  corresponds  with  the  shipment 
made,  is  duly  signed  by  the  agent  or  proper  official  of  the 
railway  or  freight  line;  that  it  corresponds  with  the  in- 
surance certificate  in  the  various  particulars ;  that,  if  more 
than  two  copies  were  issued,  he  has  them  all;  that  there 
are  no  printed  or  stamped  conditions  thereon  that  would 
be  likely  to  render  it  valueless  under  possible  emergencies. 


366  FOREIGN  EXCHANGE. 

If  goods  are  perishable,  see  that  they  are  routed  by  fast 
freight  and  fast  steamers.  If  bill  of  lading  only  covers 
shipment  to  the  seaport,  as  is  sometimes  the  case  when 
shipped  from  small  inland  places  where  through  bills  of 
lading  are  unobtainable,  arrangements  must  be  made 
through  your  own  agent  to  have  same  exchanged  for 
ocean  bill  of  lading  at  seaport.  Any  error  or  incom- 
pleteness of  the  documents  will  cause  a  delay  in  payment 
or  expenses. for  cablegrams  to  adjust  them. 

H3rpothecation  Certificates. 

It  is  the  custom  of  large  buyers  of  foreign  commercial 
bills  of  exchange' to  exact  of  exporters  what  is  termed 
a  "hypothecation  certificate."  This  certificate,  after  des- 
cribing the  nature  of  the  shipment  and  the  documents  in 
question,  states  in  effect  that  the  bill  of  lading  is  lodged 
as  collateral  security  for  the  acceptance  and  payment  of 
the  draft;  that  in  case  the  drawee  declines  to  accept  the 
draft,  or  it  is  not  paid  at  maturity,  the  owner  of  the  bill 
is  authorized  to  place  the  property  described  in  the  hands 
of  brokers  for  sale  for  account  of  whom  it  may  concern, 
and  apply  the  proceeds  toward  payment  of  the  draft 
and  expenses  incurred;  and  that  in  case  of  a  deficiency 
the  seller  agrees  to  pay  amount  on  demand.  Sometimes 
exporters  give  a  general  hypothecation  certdficate  to 
apply  to  any  and  all  bills  of  exchange  purchased  of 
them. 

Certificates  of  Insurance,  Eta 

Certificates  of  insurance  on  shipments  exported  are 
usually  for  a  sum  of  from  10  to  20  per  cent,  in  excess  of 
the  stated  value  of  the  goods.    They  should  be  carefully 


FOREIGN  EXCHANGE.  867 

examined  to  see  that  there  is  no  clause  which  would  ren- 
der insurance  void  in  event  of  the  shipment  not  going 
forward  at  a  specified  period,  or  that  it  would  expire  be- 
fore arriving  time  of  the  goods  in  case  of  delay  or  by- 
reason  of  any  of  the  possible  emergencies  likely  to  arise. 
The  buyer  of  foreign  commercial  bills  of  exchange 
must  be  familiar  with  the  revenue  laws  and  commercial 
customs  of  all  the  foreign  countries,  as  well  as  the  var- 
ious rates  of  discount  upon  the  several  classes  of  paper 
as  they  change  from  day  to  day. 

Various  Rates  of  Discount. 

You  should  always  bear  in  mind  that  a  different  rate 
for  discount  applies  to  the  different  classes  of  bills.  For 
instance,  on  documentary  bills  where  documents  are  for 
payment,  the  discount  or  rebate  rate  is  1  per  cent,  below 
the  bank  of  England  official  minimum  discount  rate.  If 
drawn  on  firms  (not  bankers)  and  documents  are  for  ac- 
ceptance, the  discount  rate  would  be  1/4  or  1  per  cent, 
above  the  private  discount  rate  for  bankers'  bills. 

If  drawn  on  bankers,  whether  documentary  or  other- 
wise (which  are  always  for  acceptance),  the  discount 
rate  would  be  the  private  rate  of  discount,  which  fluc- 
tuates according  to  demand  and  supply  of  such  bills; 
and  in  case  of  large  transactions  it  is  customary  for 
buyers  of  such  bills  here  to  cable  their  correspondents 
abroad  for  a  discount  rate  to  apply  on  bills  to  arrive  by 
next  mail  or  for  a  stipulated  period  before  buying,  in 
order  that  they  may  know  exactly  at  what  rate  the  bills 
can  be  discounted  upon  their  arrival.  Without  such  pre- 
vious arrangement  the  discount  rate  might  change  ma- 
terially and  result  in  loss  upon  the  transaction. 


368  FOREIGN  EXCHANGE. 

The  Bank  of  England  Rate. 

The  Bank  of  England  official  minimum  discount  rate 
is  fixed  by  the  directors  of  the  Bank  of  England  at  their 
meetings  upon  Thursday  of  each  week,  and  their  decision 
usually  appears  in  the  financial  columns  of  our  daily 
papers  reading  thus:  "Bank  of  England  minimum 
discount  rate  unchanged,"  or  "the  Bank  of  England  in- 
creased (or  reduced)  its  minimum  discount  rate  to  3  per 
cent,"  etc. 

The  private  discount  rate  is  the  rate  at  which  private 
banks  (meaning  all  those  in  Great  Britain  other  than 
the  Bank  of  England)  will  discount  bills  of  exchange 
for  account  of  the  owners  or  last  indorsers,  and  this  dis- 
count is  governed  by  the  Bank  of  England  discount  rate, 
and  also  by  the  supply  of  bills  in  the  market  for  discount, 
but,  except  under  unusual  conditions,  the  private  dis- 
count rate  will  always  be  about  %  of  1  per  cent,  below 
the  Bank  of  England  official  minimum  discount  rate. 

What  are  known  as  "rebate  rates"  apply  only  to  time 
commercial  bills  of  exchange  drawn  on  firms  where  doc- 
uments are  for  payment;  that  is,  where  bill  of  lading  is 
delivered  only  upon  payment  of  the  draft.  This  rebate 
is  an  allowance  made  to  the  payee  or  drawee  from  the 
face  amount  of  the  draft,  if  paid  before  maturity,  or  be- 
fore due,  and  such  rebate  is  1  per  cent,  below  the  Bank 
of  England  official  minimum  discount  rate. 

Theoretically  the  Bank  of  England  controls  the  dis- 
count market  in  London.  This  control  is  sought  to  be 
maintained  through  the  official  rate  of  discount  at  the 
bank,  which  is  advanced  when  its  stock  of  gold  bullion  is 
being  largely  drawn  upon  for  export  to  the  United 


FOREIGN  EXCHANGE.  369 

States  or  European  countries.  If  the  conditions  pre- 
vail to  make  it  inadvisable  to  raise  the  bank  rate,  a  higher 
price  for  gold  will  be  charged;  or  if  it  finds  difficulty 
in  controlling  the  discount  rate,  it  will  create  a  demand 
for  discounts  by  borrowing  on  its  security,  thereby  in- 
creasing the  demands  for  discounts. 

Unlike  the  Bank  of  England,  which  undertakes  to 
control  the  stock  of  gold  by  advancing  the  discount  rates, 
the  Bank  of  France  protects  its  stock  of  gold  by  increas- 
ing the  price  of  gold  when  withdrawal  of  a  large  amount 
is  threatened.  The  official  discount  rate  of  the  Bank  of 
France,  which  controls  the  market  rate,  rarely  changes 
except  in  case  of  financial  or  pohtical  crises. 

Safe  and  Unsafe  Bills. 

There  are  certain  classes  of  commercial  bills  which, 
unless  special  care  is  taken,  are  regarded  as  unsafe.  In 
the  case  of  cotton,  on  account  of  the  different  grades  and 
the  fact  that  there  is  so  great  a  difference  in  the  price 
of  the  different  grades,  and  its  being  so  easy  to  substi- 
tute one  grade  for  another,  the  bills  against  shipments 
should  be  purchased  only  of  well-known  and  responsible 
shippers  or  indorsers. 

Grain  shipments  are  all  right,  providing  the  grain  in- 
spector at  the  shipping  point  is  of  good  reputation; 
otherwise  he  might  inspect  as  No.  2  what  was  billed  as 
No.  1. 

Perishable  goods  are  always  more  or  less  risky,  on 
account  of  the  danger  of  delay  and  of  the  goods  Gpoihng. 
You  should  see  that  perishable  goods  are  sent  by  fast 
freight  lines  and  fast  steamers. 

I.B.I..  Vol.  4—24 


370  FOREIGN  EXCHANGE. 

Pianos,  organs,  musical  instruments,  and  such  goods 
have  imaginary  values,  and  could  rarely  be  sold  at  the 
price  at  which  billed. 

"Banker's  reimburse  bills"  are  those  where  drafts  are 
drawn  against  a  shipment  exported,  upon  a  banker,  the 
documents  being  for  acceptance.  When  buying  such 
bills  you  should  keep  a  record  showing  names  of  in- 
dorsers  and  keep  close  watch  of  the  drawer  or  shipper 
until  the  bill  is  paid.  The  shipper  should  be  responsible, 
and,  if  buying  a  considerable  amount  of  such  bills  on 
the  same  drawee,  you  should  ascertain  through  your  cor- 
respondent abroad  the  responsibilty  of  the  drawee,  and 
be  sure  you  do  not  buy  more  bills  against  a  single  drawee 
than  his  ordinary  business  requirements  would  indicate 
he  needed. 

Banks  selling  commercial  bills  of  exchange  (documen- 
tary) sometimes  stamp  them,  for  example,  "In  case  of 
need  with  the  Bank  of  Scotland,  London,"  or  some  other 
bank.  This  is  done  to  avoid  charge  of  intermediate 
banks  for  indorsing  or  protesting  drafts,  which  charge  is 
usually  very  exorbitant.  When  so  stamped,  it  is  a  notice 
to  all  holders  of  the  draft  they  may  call  upon  the  bank 
named,  if  the  draft  is  not  promptly  accepted  or  honored, 
for  rehef ;  therefore  there  is  no  necessity  ^f or  protesting. 
The  bank  mentioned  will,  by  previous  arrangement,  al- 
ways honor  such  drafts  and  charge  to  the  account  of  the 
bank  indorsing  such  notation  thereon. 

Clean  Bills  of  Exchange. 
"Clean  bills"  of  exchange  are  those  having  no  bill  of 
lading  attached,  although  they  may  have  attached  insur- 
ance certificate  and  an  invoice  of  shipment.     If  these 


FOREIGN  EXCHANGE.  371 

clean  bills  are  drawn  upon  firms,  they  are  subject  to  a 
discount  rate  of  1/4  of  1  per  cent,  above  the  private  dis- 
count rate  of  the  day;  but  if  drawn  upon  bankers,  they 
will  be  discounted  at  the  private  discount  rate. 

Commercial  bills  of  exchange  drawn  by  exporters 
without  documents  are  generally  upon  their  own  house 
or  branch  abroad,  and  are  against  funds  which  have  ac- 
cumulated to  their  credit  from  payments  for  shipments 
previously  made.  Exporters  before  selling  their  own 
bills  of  this  kind  usually  wait  until  the  rates  for  exchange 
here  are  high.    Such  bills  are  discountable. 

Commercial  bills  of  exchange  drawn  upon  bankers  are 
always  for  acceptance,  unless  otherwise  specified,  and  the 
discount  rate  applying  to  such  bills  is  the  private  dis- 
count rate  of  the  day. 

Documentary  Bills. 

Documentary  commercial  bills  of  exchange  drawn  up- 
on firms  or  banks  where  documents  are  for  payment  can- 
not be  discounted  upon  the  market,  as  in  the  case  of  such 
bills  where  documents  are  for  acceptance,  for  the  reason 
that  banks  abroad  to  which  bills  are  sent  for  collection 
will  not  undertake  to  discount  commercial  bills  unless 
they  are  what  is  called  "clean"  bills — ^that  is,  those  hav- 
ing no  documents  or  those  which  permit  the  documents 
to  be  delivered  when  the  draft  is  accepted  by  the  drawee. 

A  documentary  or  commercial  bill  of  exchange,  ac- 
companied by  instructions  from  the  exporter  or  drawer, 
to  deliver  documents  (bill  of  lading,  etc.)  only  upon  pay- 
ment of  the  draft  by  the  importer  or  drawee,  which  are 
drawn  upon  a  firm,  are  subject  to  a  discount  rate  of  1 
per  cent,  below  the  Bank  of  England  official  minimum 


372  FOREIGN  EXCHANGE. 

discount  rate.  If  the  instructions  are  to  deliver  docu- 
ments upon  acceptance  of  the  draft,  the  same  rate  of  dis- 
count by  the  holder  (bank)  at  %  of  1  per  cent,  above 
the  private  discount  rate  of  the  day. 

Cost  of  Eevenue  Stamps. 

Drafts  drawn  in  the  United  States  payable  in  foreign 
countries  are  subject  to  the  revenue  laws  of  such  foreign 
countries,  and  the  cost  of  stamps  so  affixed  abroad  must 
be  paid  by  the  holders  of  the  bills,  who  in  turn  generally 
charges  to  the  bank  or  banker  from  whom  they  receive 
the  same  for  collection.  The  amount  of  revenue  stamps 
varies  according  to  the  country.  The  following  shows 
the  cost  on  other  than  demand  drafts  in  the  principal 
foreign  countries. 

Great  Britain:  Is.  per  £100  or  fraction  thereof,  or  1-20  of  1 
per  cent  of  rate. 

Germany:  50  pfennigs  per  1,000  marks  or  fraction  thereof, 
or  1-20  of  1  per  cent,  of  rate. 

France:  60  centimes  per  1,000  francs  or  fraction  thereof,  or 
1-20  of  1  per  cent,  of  rate. 

Belgium:  50  centimes  per  1,000  francs  or  fraction  thereof,  or 
1-20  of  1  per  cent,  of  rate. 

Holland:  50  cents  per  1,000  gulden  or  fraction  thereof,  or 
1-20  of  1  per  cent,  of  rate. 

Norway,  Sweden  and  Denmark:  60  ores  per  1,000  kroner  or 
fraction  thereof,  or  1-20  of  1  per  cent,  of  rate. 

Italy:  l/g  per  cent,  of  rate,  or  $1.13  per  $1,000. 

Russia:  1/4  per  cent,  of  rate,  or  $1.26  per  $1,000. 

Austria-Hungary:  %  per  cent,  of  rate,  or  $1.13  per  $1,000. 

Switzerland  varies  at  different  places — some  places  have  none. 

The  cost  of  revenue  stamps  required  to  be  affixed  to 
commercial  bills  in  Great  Britain  at  the  time  of  accept- 
ance of  draft  is  Is.  for  each  £100,  which  is  equivalent  to 
%  per  mille,  or  %  per  cent,  per  £1,000,  or  1-20  of  1  per 


FOREIGN  EXCHANGE.  373 

cent,  of  the  rate,  which  latter,  expressed  decimally,  when 
the  rate  is  $4.83  per  pound,  would  be  0.00244  (or  4.88 
divided  by  1-20  of  1  per  cent.)  Where  the  amount  of 
bills  is  small,  say  £1,000  and  under  it  is  safe  to  deduct  ^ 
cent  per  pound  to  cover  cost  of  revenue  stamps. 

On  short  bills — five  days'  sight  or  less — only  one- 
penny  stamps  (2  cents)  are  required. 

Miscellaneous  Charges. 

European  banks  are  noted  for  charging  for  every  item 
possible  in  connection  with  every  transaction  handled — 
such  items  as  postage  on  letters  sent  to  you  during  a  cer- 
tain period,  cost  of  cablegrams,  check-books,  envelopes, 
stationery,  and  often  a  lump  sum  for  items  that  may 
have  been  overlooked.  For  collecting  commercial  bills  of 
exchange  they  will  usually  charge,  in  England,  about 
1-20  of  1  per  cent.,  or  1  shilling  per  cent. ;  France,  1-16 
per  cent;  in  Germany,  1-20  per  cent,  in  the  larger  places 
and  from  1-16  to  %  per  cent,  in  the  smaller  places. 

Interest  at  thirty,  sixty,  or  ninety  days,  with  three 
days'  grace  added  (as  allowed  throughout  Great  Bri- 
tain), can  easily  be  arrived  at  by  using  printed  tables 
furnished  by  some  of  the  leading  foreign-exchange  bank- 
ers, which  give  the  proper  decimal  of  a  pound  to  deduct 
for  interest  and  revenue  stamp  at  the  various  rates. 
These  printed  tables  also  give  the  same  information  for 
figuring  German  and  French  bills  of  exchange. 

Complicated  Transactions. 
Exchange  transactions  become  more  complicated  when 
one  country  or  place,  as  is  often  the  case,  discharges  its 
debts  through  another  country  by  means  of  bills  of  ex- 


374  FOREIGN  EXCHANGE. 

change  drawn  upon  a  third  country  or  place ;  as,  for  in- 
stance, a  merchant  in  Chicago  importing  goods  from 
China  woilld  pay  the  exporter  in  China  with  a  check  upon 
London,  for  the  reason  that  such  check  would  be  more 
desirable  to  the  shipper  in  China,  since  the  demand  for 
exchange  in  China  is  greater  upon  London  than  upon 
the  United  States.  ' 

When  in  any  market  the  demand  for  exchange  on  a 
certain  country  or  place  is  greater  than  the  supply,  the 
deficiency  is  usually  supplemented  by  bills  on  other  coun- 
tries having  a  more  favorable  exchange  with  the  latter. 

In  the  East  Indies  those  who  ship  to  America  usually 
draw  upon  London  instead  of  America.  In  New  Or- 
leans, exporters  of  cotton,  etc.,  to  Russia,  draw  upon 
London  instead  of  St.  Petersburg.  This  is  because  Eng- 
land does  more  business  with  those  countries  than  Ameri- 
ca; besides,  London  is  regarded  as  the  greatest  money 
center,  and  exchange  upon  that  city  is  usually  more 
favorable  and  can  be  used  to  better  advantage. 

Grerman  Requirements. 
Importers  in  Germany  will  not  accept  drafts  drawn 
against  importations  until  the  duplicate  documents  (dup- 
licate draft,  bill  of  lading,  etc.,)  are  presented,  and,  in 
order  to  have  the  original  draft  accepted  immediately 
upon  its  arrival,  banks  in  this  country  when  forwarding 
such  bills  for  acceptance  and  collection  will  attach  to  the 
original  draft  a  memorandum  agreement  to  the  effect 
that  the  duplicate  bill  of  lading  is  in  their  possession,  and 
their  correspondents  (banks)  are  requested  to  guarantee 
the  acceptors  (importers)  that  the  duplicate  documents 
■will  be  delivered  to  them  as  soon  as  received,  which  guar- 


FOREIGN  EXCHANGE.  375 

antee  also  gives  the  number  and  amount  of  draft,  the 
name  of  drawer,  and  the  signature  of  a  proper  official  of 
the  bank  or  financial  institution  forwarding  the  same. 

Convenience  of  Sterling  Exchange. 

The  volume  of  transactions  in  French,  German,  and 
other  continental  exchange  is  quite  small  compared  with 
that  of  sterling  exchange.  The  reason  for  this  is  that 
most  banks  have  accounts  or  balances  only  at  London, 
and  where  balances  are  kept  in  other  European  cities 
they  are  usually  small  as  compared  with  their  London 
account.  Therefore,  in  making  remittances  to  Paris, 
BerHn,  or  other  cities  on  the  continent,  it  is  most  gen- 
erally effected  by  transferring  the  funds  to  those  cities 
from  London,  which  can  generally  be  handled  very  satis- 
factorily, by  reason  of  most  large  European  banks  hav- 
ing branches  in  London.  It  is  customary,  however,  for 
banks,  before  transferring  funds  from  their  London  ac- 
counts, to  carefully  figure  out  the  difference  in  cost  be- 
tween a  remittance  direct  from  here  to  the  city  where  it 
is  desired  to  place  the  funds  and  the  expense  of  transfer- 
ring it  from  London.  This  can  easily  be  determined  by 
ascertaining  the  rate  of  exchange  between  London  and 
the  point  referred  to. 

Precautions  Against  Wrong  Payment. 

A  "crossed  sterling  check"  is  one  payable  either  to 
bearer  or  order,  having  the  name  of  a  banker,  or  two  par- 
allel lines  and  the  abbreviation  "&  Co.,"  written  or 

printed  across  the  face,  thus:  " &  Co." 

The  effect  is  to  direct  the  bank  upon  which  it  is  drawn 
to  pay  the  check  only  when  coming  to  it  through  some 


376  FOREIGN  EXCHANGE. 

other  bank.  It  is  intended  as  an  additional  safeguard 
against  wrong  payment. 

In  most  if  oreign  countries  it  is  the  custom  of  bankers 
and  others  in  the  cashing  of  checks,  whether  drawn  pay- 
able to  order  or  bearer,  to  pay  to  the  person  presenting 
the  same,  and  under  the  laws  existing  in  these  countries 
the  paying  bank  or  banker  would  not  be  held  liable  for 
wrong  payment.  As  a  reason  for  this  seemingly  risky 
method,  it  is  claimed  that  on  account  of  the  very  severe 
penalty  imposed  for  forgery  under  their  laws,  the  requir- 
ing of  strict  personal  identification,  as  exacted  by  banks 
in  the  United  States,  is  found  unnecessary. 

As  an  additional  precaution  against  wrong  payment, 
the  laws  of  Great  Britain  require  that  where  a  check  is 
crossed,  as  explained  above,  while  not  requiring  personal 
identification,  it  must  be  cashed  through  some  bank  other 
than  the  one  upon  which  it  is  drawn. 

Notwithstanding  the  requirements  under  the  laws,  we 
presume  a  reasonable  amount  of  care  is  exercised  by 
banks  to  prevent  losses  by  incorrect  payment,  and  we  are 
informed  that  in  some  countries  a  stranger  presenting  a 
check  drawn  to  his  order  is  required  to  make  affidavit  that 
he  is  the  person  named,  for  which  affidavit  the  paying 
bank  exacts  a  small  fee. 


CHAPTER  XX. 
INVESTMENTS. 

BY  D.  R.  FORGAN.* 

There  is  a  sense  in  which  all  business  enterprises  are 
investments.  To  build  a  ship  or  a  railroad,  to  start  a 
store  or  factory,  to  pay  wages  or  place  an  advertisement 
— to  do  anything,  in  shorty  which  involves  an  outlay  of 
money  for  the  purpose  of  increasing  it — is  an  investment 
of  capital.  That  is  the  sense  in  which  political  economists 
use  the  word,  but  in  common  use  it  has  a  more  restricted 
meaning,  viz.:  the  outlay  of  money  in  the  purchase  of 
property  or  securities  which  are  expected  to  yield  a  sure 
and  regular  income  without  further  effort  on  the  part  of 
the  investor.  This  discussion  will  be  limited  to  what 
may  be  included  in  that  definition. 

At  the  outset  it  may  be  well  to  have  a  clear  view  as  to 
what  funds  are  available  for  investment;  or  to  answer 
the  question  so  often  asked  as  to  where  all  the  money 
comes  from  to  pay  for  the  enormous  issues  of  securities 
which  are  constantly  being  brought  out.  A  recent  writer 
on  this  subject  begins  with  the  statement  that  the  bank 
deposits  of  the  United  States  increased  in  the  seven  years 
from  1893-1900  by  $4,000,000,000,  and  that  "the  effort  to 
place  this  enormous  amount  of  new  capital  has  disor- 
ganized the  entire  field  of  investment."  This  is  not  cor- 
rect.   If  the  author  had  looked  deeper,  he  would  have 


*From  a  lecture  delivered  to  the  students  of  the  Unirersity  of  Chi- 
cago.   Mr.  Forgan  is  president  of  the  National  City  Bank  of  Chicago. 

377 


378  INVESTMENTS. 

seen  that  the  increase  in  loans  had  kept  pace  with  the 
increase  of  deposits,  and  that  the  banks  had  no  greater 
percentage  of  reserves  in  1900  than  in  1893.  In  fact 
about  the  time  this  pamphlet  appeared  the  banks  in  New 
York  were  under  their  legal  reserves,  and  money  was 
bringing  good  rates  all  over  the  country  because  it  was 
scarce.  Only  such  portion  of  the  increase  of  deposits  as 
represented  the  savings  of  the  masses,  or  the  surplus 
earnings  of  commercial  enterprises,  was  available  for  in- 
vestment. The  remainder,  which  constituted  by  far  the 
larger  part  of  the  deposits,  represented  only  expansion 
of  credit,  and  was  not  available  for  permanent  invest- 
ment. 

Bank  Deposits  are  Largely  Credits. 

It  is  a  common  error  to  consider  bank  deposits  as 
"money  in  the  bank,"  whereas  they  are  largely  composed 
of  credits  on  a  ledger.  When  a  banker  lends  a  customer 
'$100,000  he  takes  the  customer's  note  and  credits  the 
customer's  account  with  the  proceeds.  The  transaction 
increases  both  the  deposits  and  loans  by  $100,000,  but 
adds  nothing  to  the  "money  in  the  bank."  Even  when 
the  customer  draws  his  checks  upon  the  credit,  it  does 
not  necessarily  follow  that  the  money  in  the  bank  is  re- 
duced, for  his  checks  either  go  to  the  credit  of  another 
customer  of  the  bank  or  they  find  their  way  into  another 
bank  and  are  oif  set  by  similar  transactions  in  that  bank. 

This  credit  of  $100,000  created  by  the  banker  dis- 
counting the  note  of  his  customer  performs  all  that 
actual  money  can  perform,  and  practically  adds  that 
amount  to  the  resources  of  the  business  community  while 
it  is  extant.  If  the  credit  has  been  wisely  granted,  the 
note  win  be  paid  when  due  by  the  customer  accumulating 


INVESTMENTS.  379 

enough  credit  balance  in  his  bank  account  and  then  giv- 
ing his  check  for  his  note.  The  transaction  will  reduce 
the  bank's  assets  and  deposits  by  $100,000;  but  it  will 
not  increase  nor  diminish  the  "money  in  the  bank." 

Little  Actual  Cash  Demanded. 

In  only  a  small  portion  of  the  transactions  thus  ac- 
complished by  credit  will  actual  cash  be  demanded,  and 
against  this  the  banker  must  keep  a  certain  percentage 
of  his  deposits  in  cash  reserves.  If  the  credit  be  granted 
to  a  worthless  customer  who  cannot  retire  it  when  due, 
then  the  bank  loses  the  amount,  because  its  resources  are 
reduced  by  $100,000  while  its  habilities  remain  the  same. 
Right  there  in  the  difference  between  redeemable  and 
irredeemable  credit  lies  all  the  difference  between  good 
banking  and  bad  banking,  good  currency  and  bad  cur- 
rency, good  investment  securities  and  bad  investment 
securities. 

Thus  the  increase  of  bank  deposits  was  due  more  to 
the  extension  of  credit  than  to  an  increase  of  actual 
money  in  the  banks,  or  of  funds  looking  for  investment. 
In  hke  manner,  when  deposits  decrease  it  is  a  contrac- 
tion of  credit  which  takes  place  rather  than  a  with- 
drawal of  money. 

In  October,  1893,  for  example,  there  was  more  money 
in  the  national  banks  by  $28,000,000  than  there  was  in 
1892,  yet  the  deposits  were  $500,000,000  less  on  ac- 
count of  the  contraction  of  credit  due  to  the  panic — the 
loans  and  other  credit  assets  being  correspondingly  re- 
duced. 


380  INVESTMENTS. 

The  Potency  of  Credit. 

In  any  financial  discussion  we  shall  soon  go  astray  if 
we  lose  sight  of  the  place  and  potency  of  credit.  It  is 
estimated  that  90  per  cent,  of  all  business  transactions 
are  done  on  credit,  and  the  currency  used  in  the  majority 
of  cases  composing  the  other  10  per  cent  is  only  credit 
in  another  form.  In  credit  modern  finance  lives,  moves, 
and  has  its  being.  It  is  not  merely  the  means  by  which 
you  buy  and  buy  and  pay  by-and-by. 

It  is  difficult  to  define,  but  we  may  say  credit  is  the 
medium  through  which  the  representatives  of  property 
or  value  may  be  exchanged.  The  bank  customer's  note 
is  in  one  sense  only  a  slip  of  paper,  but  it  represents  all 
the  property  owned  by  the  makers.  In  the  same  way 
bonds  represent  the  property  they  are  based  upon;  cer- 
tificates of  stock  represent  the  capital  of  the  company 
which  issues  them,  and  bank  deposits  stand  for  actual 
cash.  Credit  rests  on  confidence,  which  is  simply  a 
reflection  of  the  existing  conditions.  When  confidence 
prevails,  credit  expands  easily — that  is,  the  representa- 
tives of  property  and  cash  are  readily  interchanged. 
When  confidence  is  shaken,  credit  contracts  in  propor- 
tion to  the  gravity  of  the  cause,  and  interchange  becomes 
correspondingly  difficult.  If  confidence  be  destroyed, 
there  is  a  panic,  when  it  is  almost  impossible  for  the 
bank  customer  to  negotiate  his  note,  the  railroad  to 
sell  its  bonds,  or  the  industrial  company  to  float  its 
stock.  And  all  this  happens  while  the  money  in  cir- 
culation is  little,  if  any,  reduced. 

Recent  Expansion  of  Credit. 

The  past  few  years  have  witnessed  a  remarkable  ex- 
pansion of  credit  in  this  country.     The  bank  deposits  in- 


INVESTMENTS.  381 

creased  about  $3,500,000,000,  and  new  stocks  and  bonds 
issued  during  the  period  probably  reached  a  total  of 
$10,000,000,000,  while  the  total  money  in  the  country, 
paper  and  metallic,  increased  only  about  $500,000,000. 
In  other  words,  for  every  dollar  in  money  added  to  the 
general  stock,  bank  deposits  increased  $7  and  securities 
$20.  It  is  not  necessary,  therefore,  that  money  be 
available  to  absorb  a  new  issue  of  securities.  If  there 
is  room. for  them  in  this  sea  of  credit,  they  may  be 
launched  and  floated. 

When  a  new  issue  of  investment  securities  is  made,  it 
is  generally  set  afloat  as  collateral  to  an  expansion  of 
credit  by  the  banks  which  extend  to  the  broker  or  bond 
dealer  credit  with  which  to  carry  the  securities  until  a 
market  is  found  for  them  among  investors.  The  rapid- 
ity with  which  investors  will  absorb  them,  and  the  price 
paid  for  them,  depend  upon  their  desirability  and  the 
condition  of  the  money  market  — or,  more  correctly,  of 
the  credit  market. 

Effect  of  Public  Confidence. 

If  confidence  abounds,  people  readily  invest  in  the 
representatives  of  property — stocks  and  bonds — and  this 
creates  a  strong  demand  and  a  high  price.  On  the  other 
hand,  if  confidence  be  shaken,  people  prefer  cash  or  its 
representative — bank  balances — of  certain  value  to  se- 
curities of  uncertain  value,  and  they  are  slow  to  con- 
vert the  former  into  the  latter;  and  thus  the  demand  is 
less  than  the  supply,  and  the  price  obtained  is  conse- 
quently lessened. 

When  conditions  are  panicky,  new  issues  of  securities 
cannot  be  sold  at  all,  and  the  holders  of  old  issues  become 


382  INVESTMENTS. 

SO  anxious  to  convert  them  into  bank  balances  of  stable 
value  that  prices  fall  far  below  intrinsic  value,  and  then 
it  is  "bargain  day"  in  the  credit  world.  Many  rich 
men  hold  their  reserves  for  such  occasions,  which  con- 
stantly recur,  and  they  grow  richer  by  so  doing. 

Funds  Available  for  Investment. 

The  funds  available  for  investment,  which  gradually 
absorb  securities,  come  chiefly  from  the  following 
sources,  the  first  two  of  which  have  already  been  sug- 
gested: 

1.  Savings  banks  deposits — representing,  not  an  ex- 
pansion of  conmiercial  credit,  but  the  savings  of  the  com- 
mon people. 

2.  That  portion  of  the  deposits  of  commercial  banks 
which  represents  the  accumulation  of  the  profits  of  busi- 
ness and  which  may  be  withdrawn  from  business. 

3.  The  funds  of  life  and  fire-insurance  companies. 

4.  The  funds  of  educational,  charitable,  and  benevo- 
lent institutions. 

5.  The  funds  of  estates  in  cases  where  the  executors 
decide  to  exchange  the  assets  at  risk  of  general  business 
for  permanent  investments,  which  call  for  no  business 
management  on  the  part  of  the  owner. 

6.  The  funds  of  retired  business  men  who  follow  the 
same  course  for  similar  reasons. 

7.  The  investment  accounts  of  commercial  banks 
maintained  for  the  purpose  of  having  some  assets  which 
can  be  converted  into  cash  immediately  in  case  of  need. 

8.  That  portion  of  the  increment  derived  from 
former  investments  which  the  holders  do  not  spend. 


INVESTMENTS.  883 

Increase  of  Investment  Securities. 

In  such  good  times  as  we  had  for  several  years  prior 
to  1901  the  combined  demand  from  all  these  sources  was 
enormous;  hence  both  the  rise  in  the  price  of  securities 
and  the  rush  to  create  and  float  new  issues  which  we  wit- 
nessed during  that  period. 

I  have  not  been  able  to  find  statistics  which  present  a 
complete  account  of  the  increase  in  the  supply  of  invest- 
ment securities  in  the  United  States  during  the  period 
I  have  named.  Some  idea,  however,  may  be  obtained 
from  the  amount  of  bonds  and  stocks  listed  on  the  New 
York  Stock  Exchange,  although  these  are  but  a  small 
portion  of  the  whole.  For  the  five  years  ending  1901 
there  were  hsted  $949,516,639  bonds  and  $1,443,850,208 
stocks,  exclusive  of  those  which  merely  replaced  old  se- 
curities. In  addition  to  these,  every  village,  town,  city, 
county,  and  state  in  the  country  has  its  own  local  securi- 
ties. New  issues  are  also  constantly  being  created  by 
new  inventions,  such  as  the  telephone,  the  bicycle,  the 
automobile,  etc.,  so  that  my  former  estimate  of  a  total 
of  $10,000,000,000  of  new  securities  issued  during  these 
five  years  is  probably  not  far  astray. 

Yet  no  question  is  more  frequently  asked  than  this: 
Where  can  I  find  a  safe  investment  which  will  yield  a 
fair  rate  of  interest?  And  perhaps  no  question  is  more 
difficult  to  answer. 

What  Constitutes  Desirability. 

A  man  of  little  experience  and  superficial  knowledge 
may  answer  readily  enough,  but  the  answer  wiU  come 
slowly  from  a  man  of  conservative  judgment.  The  de- 
sirability of  any  investment  consists  of  three  attributes: 


384  INVESTMENTS. 

(1)  Safety,  (2)  Profit,  (3)  Permanency.  All  three, 
however,  are  relative  terms.  In  investments  there  is  no 
such  thing  as  absolute  safety,  assured  profit,  or  un- 
changeable conditions.  United  States  bonds  are  today 
the  highest-class  investments  in  the  world;  yet  men  are 
still  living  who  saw  them  go  to  a  discount  of  78  cents  on 
the  dollar.  Within  the  last  decade  their  profitableness 
has  been  reduced  by  half,  and  unless  we  have  another  war 
the  indications  are  that  they  will  all  be  paid  off  within 
our  own  day.  All  we  can  do,  therefore,  is  to  consider 
the  relative  safety,  profitableness,  and  permanency  of 
the  different  classes  of  investment.  There  are  invest- 
ments which  are  more  safe  than  profitable ;  others  which 
are  profitable,  but  not  safe ;  and  many  which  are  neither 
safe  nor  profitable,  but  are  certainly  permanent. 

We  shall  now  consider  the  different  kinds  of  invest- 
ments offered  in  the  United  States,  grouped  as  far  as 
possible  under  four  divisions: 

I. — Public  Securities. 

Government  Bonds. — At  the  head  of  this  class  stand 
Government  bonds,  of  which  there  were  at  one  time  out- 
standing over  $2,500,000,000,  but  of  which  there  are  now 
only  about  $1,000,000,000.  These  are  held  chiefly  by 
national  banks  as  security  for  their  circulation,  or  for 
government  deposits,  and  by  trustees  for  funds  in  cases 
where  safety  is  a  more  important  consideration  than 
profit.  They  are  as  safe  as  anything  on  earth  and  al- 
ways marketable,  but  they  scarcely  call  for  our  considera- 
tion, because  they  no  longer  offer  any  attraction  to  ordi- 
nary investors. 


INVESTMENTS.  385 

One  of  the  striking  marks  of  our  national  prosperity  is 
the  fact  that  American  investors  have  recently  been  of- 
fered and  have  readily  accepted  participation  in  loans 
to  foreign  countries.  Russian  government  bonds  issued 
in  connection  with  their  great  railway  were  taken  at  a 
price  yielding  4%  to  the  investor;  the  German  loan  of 
1901,  3%;  the  English  short-time  loan  of  1900,  3.4;  and 
the  English  irredeemable  consols  issued  in  1902,  about 
2.6  per  cent.  Our  own  governments  now  yield  less  than 
2  per  cent,  to  the  purchaser. 

State  Bonds. — Next  in  order  come  State  bonds.  Their 
history  is  not  one  of  the  things  we  are  proud  of.  A  total 
of  over  $300,000,000  (principal  and  interest)  'of  them  is 
now  delinquent  by  reason  of  repudiation  on  the  part  of 
their  makers.  A  large  part  of  this  delinquency  is  made 
up  of  what  is  known  as  "carpet-bag"  bonds  issued  by 
Southern  states  during  the  period  of  reconstruction  and 
later  repudiated  on  the  ground  that  the  government  cre- 
ating them  did  not  properly  represent  the  people.  But 
that  is  not  true  at  all.  Virginia,  for  example,  has 
old  bonds  outstanding  which  were  created  before  the  war 
and  which  you  can  buy  for  a  few  cents  on  the  dollar. 
This  is  possible  because  the  Eleventh  amendment  to  the 
Constitution  took  away  the  right  of  private  parties  to 
sue  states  for  payment  of  their  debts. 

It  is  probable  that  the  days  of  repudiation  are  past, 
but  history  sometimes  repeats  itself,  and  it  is  well  for 
the  purchaser  of  state  obligations  to  remember  that  their 
payment  depends  entirely  upon  pubhc  morality.  If  he 
confines  himself,  however,  to  the  bonds  of  states  whose 
good  financial  reputation  is  necessary  to  the  business  in- 

I.B.L.  Vol.4— 25 


I 

386  INVESTMENTS. 

terests  of  their  citizens,  the  risk  of  loss  which  is  inherent  in 
all  investments  will  be  reduced  to  a  minimum. 

Municipal  Bonds. — What  has  just  been  said  regard- 
ing state  obligations  applies  with  equal  force  to  the  obli- 
gations of  municipalities.  There  has  been  much  repudi- 
ation also  on  their  part,  but  most  of  it  has  been  of  bonds 
for  which  the  people  of  the  municipalities  never  received 
any  consideration,  the  bonds  having  been  issued  during 
the  speculative  period  succeeding  the  war  in  support  of 
railroad  schemes. 

Unlike  states,  municipalities  can  be  forced  to  pay 
through  the  courts,  and  so  numerous  have  such  cases  been 
that  almost  every  point  concerning  the  legality  of  muni- 
cipal obligations  has  been  finally  decided  by  the  courts. 
The  opinion  of  a  competent  lawyer  as  to  their  validity 
is  now  enough  to  satisfy  investors,  and  such  an  opinion 
is  always  offered  by  bond  dealers  when  offering  the 
bonds.  Beyond  that  it  is  only  necessary  to  ascertain  the 
population,  and  the  general  prosperity  of  the  municipal- 
ity, and  the  relation  these  bear  to  its  total  indebtedness, 
in  order  to  decide  upon  the  desirability  of  its  obligations 
as  an  investment. 

In  inany  states  the  legal  limit  of  such  indebtedness  is 
only  5  per  cent,  of  the  assessed  value  of  the  property 
within  the  municipality,  and  this  is  perhaps  only  1  per 
cent,  of  the  real  value.  With  this  safeguard,  with  our 
population  increasing  at  the  rate  of  4,000  per  day,  and 
with  the  prevailing  prosperity  of  our  country,  municipal 
obligations  are  now  very  popular  investments.  They 
yield,  according  to  their  grade,  from  3/5  to  5  per  cent, 
to  the  investor,  and  as  a  class  they  are  one  of  the  best  in- 
vestments in  the  market. 


INVESTMENTS.  387 

II. — ^Real-Estate  Securities. 
The  purchase  of  real  estate  itself  may  be  considered 
as  an  investment  if  it  is  already  improved  and  yields  an 
income,  or  if  the  purchaser  improves  it  immediately  after 
its  purchase.  To  buy  unimproved  real  estate  simply 
with  the  hope  that  it  will  increase  in  value  in  the  future, 
is  a  speculation,  not  an  investment. 

Among  men  who  have  been  successful  in  a  small  way 
the  purchase  of  unimproved  real  estate  is  at  times  quite 
popular.  The  idea  seems  to  be  inherited  that  to  own  a 
piece  of  property  is  a  mark  of  respectability  and  sub- 
stance. The  thought  that  it  cannot  run  away  or  disap- 
pear seems  to  make  it  safe,  and  there  is  always  the  hope 
that  it  will  increase  in  value.  Nothing,  however,  could 
be  more  delusive.  In  ninety-nine  cases  out  of  a  hundred 
it  would  pay  better  to  put  the  money  in  a  savings  bank 
at  3  per  cent,  interest. 

Even  improved  property  is  usually  unsatisfactory  as 
an  investment.  When  taxes,  depreciation  by  use  and 
by  change  of  style,  repairs,  insurance,  periods  of  va- 
cancy, and  failure  to  collect  rents  are  taken  into  account, 
the  owners  of  real  estate  are  generally  disappointed  in 
the  net  result.  There  are  many  notable  exceptions,  of 
course,  but  to  own  much  real  estate  and  get  little  out  of 
it  is  so  common  that  the  term  "real-estate  poor"  has  come 
to  be  quite  well  understood  among  business  men.  The 
safest  way  to  invest  money  in  real  estate  is  to  buy  it  and 
lease  it  to  others  to  build  upon.  In  good  locaUties  the 
ground  rent  is  assured  by  this  means,  and  this  makes  one 
of  the  safest  investments  known.  There  is  not  enough 
of  such  business,  however,  to  make  it  generally  available. 


388  INVESTMENTS. 

Mortgages. — Another  way  to  invest  money  in  real 
estate  is  to  advance  it  on  mortgages,  with  a  margin  which 
should  not  be  less  than  50  per  cent.  Even  then  you  are  not 
sure  that  you  will  not  have  to  foreclose  your  mortgage 
and  take  the  property.  A  fall  of  50  per  cent,  in  the  es- 
timated value  of  real  estate  during  the  currency  of  a 
mortgage  even  in  growing  and  prosperous  communities 
is  by  no  means  unconmion.  The  value  of  real  estate  is 
never  more  than  an  estimate — an  opinion — in  which  it  is 
always  difficult  to  find  two  authorities  who  agree.  There 
is  nothing  wilder  or  more  extravagant  than  the  ideas  of 
otherwise  sensible  men  on  the  value  of  real  estate  during 
a  period  of  inflation. 

I  remember  a  case  in  Minneapolis  which  will  serve  as 
an  illustration.  A  man  after  successful  litigation  be- 
came the  owner  of  a  tract  of  land  near  that  prosperous 
city,  valued  in  popular  opinion  at  a  million  dollars.  He 
became  involved  in  debt  to  the  extent  of  $250,000  and 
mortgaged  all  his  real  estate  for  the  benefit  of  his  credit- 
ors. The  mortgage  was  foreclosed  for  the  various  cred- 
itors by  the  leading  lawyer  of  the  city — one  of  the  ablest 
all-round  business  men  I  have  ever  known — who  thus  be- 
came thoroughly  familiar  with  the  property.  The  bank 
with  which  I  was  connected  was  one  of  the  creditors,  and 
I  remember  his  telling  me  that  the  claim  was  quite  good 
because  the  debtor  would  be  certain  to  redeem  the  prop- 
erty from  the  foreclosure.  It  was  not  redeemed,  however, 
and  it  fell  to  my  lot  to  arrange  a  division  of  the  property 
among  the  creditors.  For  that  purpose  I  had  another 
valuation  made  of  the  various  lots,  which  amounted  in 
all  to  about  $70,000.  On  that  basis  the  milhon-doUar 
property  was  divided,  the  best  cash  offer  we  could  get 


INVESTMENTS.  389 

being  about  two-thirds  of  that  amount.  In  other  words, 
the  value  of  a  tract  of  land  contiguous  to  a  thriving  city 
of  (then)  160,000  inhabitants  shrank  in  popular  estima- 
tion in  a  few  years  from  $1,000,000  to  less  than  $50,000. 

Anyone  wishing  to  invest  his  money  in  a  real-estate 
mortgage  should  make  sure  that  he  is  getting  a  first 
mortgage.  There  is  nothing  on  the  face  of  a  mortgage 
or  trust  deed  in  Illinois  and  some  other  states  to  show 
whether  a  prior  Hen  exists,  and  the  palming  off  of  a 
second  or  third  mortgage  as  a  first  is  not  an  unknown 
trick.  He  should  also  be  satisfied  that  the  title  is  clear 
in  the  name  of  the  mortgagor.  This  is  usually  evidenced 
by  a  title  guarantee  policy,  which  is  sufficient  in  most 
cases,  though  by  no  means  infalhble. 

Then  he  should  insist  on  seeing  the  property  with  his 
own  eyes.  No  matter  how  rehable  the  mortgage  dealer 
may  be,  a  purchaser  may,  by  visiting  the  property,  dis- 
cover something  which  may  save  him  from  an  unsafe,  or 
at  least  a  slow  and  unsatisfactory,  investment.  It  is  not 
impossible  that  he  may  discover  that  the  building  shown 
to  him  by  the  mortgage  broker  as  on  the  property  is  as  yet 
far  from  completed,  and  that  only  part  of  the  money  rep- 
resented by  the  mortgage  has  been  paid  to  the  mort- 
gagor, the  balance  being  represented  by  a  credit  on  the 
books  of  the  broker  which  is  to  be  exhausted  as  the  build- 
ing goes  on.  In  this  case  the  investor  must  trust  to  the 
broker  to  see  that  the  building  is  completed  free  of  me- 
chanic's liens  and  fit  for  occupancy. 

Whether  it  is  safe  to  trust  the  broker  depends  upon  his 
financial  and  moral  standing — which  opens  up  a  new 
field  of  investigation  for  the  investor.  He  should  also 
inquire  into  the  financial  standing  of  the  mortgagor. 


390  INYESTMENTS. 

If  that  be  unsatisfactory,  the  payment  of  interest  is  likely 
to  be  irregular,  and  foreclosure  may  become  necessary  on 
account  of  the  mortgagor's  difficulties,  although  the 
property  itself  may  be  quite  good  for  the  amount  in- 
volved. Foreclosure  is  a  slow,  tedious,  and  expensive 
way  of  getting  your  money  back,  even  if  it  does  get  it 
back. 

Building  and  Loan  Associations. — One  of  the  worst 
forms  of  investment  in  real  estate,  in  my  opinion,  is 
building  and  loan  associations.  They  are  gotten  up  in 
most  attractive  forms  to  catch  the  monthly  savings  of 
thrifty  people  with  moderate  incomes.  I  know  there  are 
some  of  these  in  the  older  parts  of  the  country  that  are 
apparently  successful,  but  my  experience  of  them  in  the 
West  leads  me  to  consider  them  as,  on  the  whole,  almost 
the  easiest  concerns  to  get  your  money  into  and  the  hard- 
est to  get  it  out  of  that  I  know.  Their  plans  seem  so  sim- 
ple that  anyone  can  understand  them;  nevertheless,  one 
of  my  friends  in  Chicago,  who  is  a  thorough  accountant, 
lost  the  savings  of  years  in  a  building  and  loan  associa- 
tion of  which  he  himself  was  the  annual  auditor. 

Farm  Mortgages. — On  the  other  hand,  farm  mort- 
gages are  one  of  the  best  real-estate  investments.  Swind- 
lers have  not  been  unknown  along  this  line,  but  I  believe 
the  results  to  investors  have  been  as  satisfactory  as  in 
any  line  of  investments.  As  in  all  others,  prudence  and 
common-sense  must  be  exercised;  but  there  are  many 
corporations  and  firms  of  high  standing  engaged  in  the 
farm-mortgage  business,  and  by  dealing  only  with  such, 
and  avoiding  certain  states  where  the  laws  seem  to  have 
been  made  for  the  debtors,  a  safe  and  fairly  remunerative 


INVESTMENTS.  891 

investment  in  farm  mortgages  is  easily  obtained.  On 
the  whole,  investors  should  remember  that  to  invest  safely 
and  satisfactorily  in  real-estate  securities  requires  more 
knowledge  of  business,  more  experience,  and  better  judg- 
ment than  to  invest  in  almost  anything  else. 
III. — Corporation  Bonds. 

Railroad  Bonds. — Under  this  head  come,  first,  railroad 
bonds,  which  have  absorbed  more  capital  than  any  other 
investment  in  this  country.  In  the  year  1899,  there  were 
187,781  miles  of  railroad  in  operation,  the  bonds  on 
which  amounted  to  $5,699,858,000,  or  $30,000  per  mile. 
The  interest  paid  on  the  bonds  was  $245,250,000  or  4.12 
per  cent.  This  great  class  of  investment  securities  is 
composed  of  various  kinds.  We  have  not  only  first, 
second,  and  third  mortgage  bonds,  but  consolidated  mort- 
gage bonds,  income  bonds,  convertible  bonds,  terminal 
bonds,  collateral  trust  bonds,  equipment  bonds,  etc. 

Among  such  a  mass  and  variety  as  I  have  mentioned 
there  are  many  of  inferior  quality,  and  some  of  even 
worthless  character.  The  chief  guide  for  the  investor  is 
in  the  earning  capacity  of  the  road,  and  reliable  informa- 
tion on  that  point  is  easy  to  obtain.  If  the  road's  net 
earnings  are  at  least  twice  its  bonded  debt  charges,  and 
if  the  road  is  well  kept  up  so  that  such  earnings  are 
likely  to  continue,  the  bond  may  be  considered  satisfac- 
tory in  that  respect. 

There  is  no  difficulty  in  procuring  good  railroad  bonds 
as  an  investment,  if  the  investor  confines  himself  to  the 
issues  of  well-established  roads,  and  is  content  with  a 
return  of  4  per  cent,  or  a  little  less.  It  is  when  the  bonds 
of  new  railway  projects  are  offered  that  caution  is  nec- 
essary. , 


392  INVESTMENTS. 

It  is  a  well-recognized  principle  in  railroad  building 
that  the  road  should  be  made  not  only  to  pay  for  its  cost, 
but  to  yield  a  profit  to  the  projectors  besides.  In  other 
words,  there  is  usually  some  "water"  in  the  first  issue  of 
bonds — to  say  nothing  of  the  stock.  The  squeezing  out 
of  the  water  in  times  past  has  frequently  been  an  ex- 
pensive operation  for  the  bond  holders.  The  appoint- 
ment of  a  receiver,  the  discrediting  of  the  securities,  the 
purchase  of  them  by  "insiders"  at  a  heavy  discount,  the 
"reorganization"  of  the  road,  or  the  sale  of  it  to  a  large 
system,  and  the  final  happy  outcome  for  said  "insiders," 
is  a  process  with  which  the  student  of  railroad  history  is 
familiar. 

Nor  have  cases  of  actual  fraud  in  this  line  of  operation 
been  wanting.  Sometimes  they  break  ground  for  a  rail- 
road with  great  ceremony.  Then  they  proceed  to  break 
the  shareholders  without  any  ceremony. 

The  Arkansas  Central  Railway  Co.  built  only  forty- 
eight  miles  of  its  projected  road,  but  its  promoters  suc- 
ceeded in  floating  $5,000,000  in  bonds  of  one  kind  or 
another  on  it.  The  road  was  so  poorly  built  (what  there 
was  of  it)  that  it  was  almost  worthless.  When  it  was 
sold  by  the  receiver  at  public  auction,  it  brought  the  sum 
of  $40,000,  and  even  that  was  paid  to  the  receiver  in  his 
own  receiver's  certificates,  which  had  been  bought  at  a 
discount.  Such  cases  sufficiently  illustrate  the  kind  of 
dangers  to  be  avoided  in  this  class  of  securities.  Our 
railroads  at  present,  however,  are  in  better  condition  than 
ever  before.  As  a  rule,  they  are  properties  of  enormous 
value  and  productive  power,  and  no  better  securities,  as  a 
whole,  can  be  had  than  properly  selected  railroad  bonds. 


INVESTMENTS.  893 

Public  Utility  Bonds. — Another  large  and  rapidly 
growing  class  of  bonds  is  composed  of  the  issues  of  cor- 
porations operating  public  utilities,  such  as  street  rail- 
ways, telephones,  gas  and  electric-light  plants,  etc.  Those 
offered  in  the  market,  however,  are  frequently  new  and 
based  on  properties  in  course  of  construction.  They  are 
disposed  of  on  "estimated"  earnings  and  well-written 
prospectuses.  In  such  cases  investors  should  never  for- 
get that,  as  a  rule,  all  the  risk  of  the  enterprise  is  put 
upon  the  bond  buyers.  If  it  turns  out  a  success,  their 
investment  will  be  good  and  they  will  get  their  5  per 
cent,  per  annum.  All  the  rest  of  the  "estimated"  profits 
that  illumine  the  pages  of  the  prospectus — be  they  ever 
so  large — will  go  to  the  promoters  of  the  scheme,  who, 
as  a  rule,  have  put  in  no  money  of  their  own. 

If  it  turns  out  a  failure,  the  bondholders  will  be  the 
only  losers.  This  division  of  profit  and  risk  does  not 
seem  quite  equitable,  but  it  is  astonishing  how  ready 
many  people  are  to  accept  it.  The  moral  is  plain:  Never 
invest  your  money  in  the  bonds  of  any  such  enterprise 
until  it  is  completed  and  can  show  actual  net  earnings 
of  not  less  than  twice  the  amount  required  to  pay  the 
interest  on  its  bonds. 

Many  of  these  enterprises  are  legitimate  and  profit- 
able, and  offer  good  security  for  their  bonds.  But  it  is 
time  enough  to  buy  the  securities  after  their  safety  has 
been  demonstrated  by  actual  experience.  This  is  a  good 
rule,  indeed,  in  regard  to  any  investment. 

Waterworks  Bonds. — There  is  another  class  of  bonds 
somewhat  similar  to  those  last  mentioned — waterworks 
bonds.     The  provision  of  law,  before  alluded  to,  limiting 


394  INVESTMENTS. 

the  borrowing  power  of  municipalities  to  5  per  cent,  of 
their  assessed  property  value,  prevents  many  towns  from 
owning  their  own  waterworks.  The  plan  usually 
adopted  is  to  form  a  corporation  to  which  an  exclusive 
franchise  is  granted  to  build  waterworks.  A  contract 
is  then  entered  into  between  the  municipality  and  the 
water  company,  by  which  the  latter  undertakes  to  supply 
the  former  with  a  certain  number  of  hydrants  for  fire 
protection,  etc.,  for  a  certain  sum  per  annum.  This 
annual  payment  is  then  used  to  form  a  sinking  fund  for 
the  retirement  of  the  bonds  issued  to  cover  the  cost  of 
the  waterworks.  The  company  has  also  the  right  to  sell 
water  to  the  inhabitants,  and  the  enterprise  is  frequently 
a  profitable  one,  forming  a  safe  basis  for  the  issue  of 
bonds.  As  usual,  however,  there  are  numerous  dangers 
to  be  avoided,  and  possible  losses  to  be  feared. 

One  of  these  is  that  the  water  supply  may  not  prove 
sufficient.  Another  is  that  the  construction  of  the  works 
may  be  cheap  and  not  last  as  long  as  the  life  of  the  bonds. 
Still  another  danger  is  that  the  municipality  cannot  be 
bound  by  its  contract  longer  than  the  Hf  e  of  the  council 
which  made  it.  A  succeeding  council  may  reduce  the 
price  paid  for  the  hydrants.  The  greatest  danger  of  all 
is  that  the  company  may  get  into  a  fight  with  the  city; 
that  the  citizens  may  claim  that  the  water  is  impure,  and 
that  as  a  result  the  waterworks  may  be  abandoned  and 
another  water  supply  adopted.  When  I  lived  in  Du- 
luth,  I  witnessed  such  a  fight  brought  about  by  an  epi- 
demic of  typhoid  fever.  When  the  fight  began,  the 
water  company's  bonds  were  considered  a  first-class  in- 
vestment, and  its  stock  was  very  valuable.      When  it 


INVESTMENTS.  395 

ended,  the  bondholders  got  seventy  cents  on  the  dollar 
and  the  stockholders  nothing. 

I  might  go  on  discussing  miscellaneous  bonds,  but  it 
is  not  necessary.  Enough  has  been  said  to  indicate  the 
dangers  to  be  guarded  against,  and  to  show  that  careful 
investigation  before  buying  is  a  necessity ;  for  while  there 
are  good,  safe  investments  offered  in  all  classes  of  bonds, 
it  is  easy  to  lose  money. 

IV.— Stocks. 

The  great  difference  between  bonds  and  stocks  is  that, 
while  the  former  are  a  lien  on  property  of  one  kind  or 
another,  the  latter  frequently  represent  nothing  more 
tangible  than  earning  capacity,  good-will,  and  the  hope 
of  the  future.  These  are  sometimes  assets  of  great,  but 
always  uncertain,  value.  As  a  rule,  it  is  the  hope  of  a 
rise  in  value  which  leads  investors  to  purchase  stocks, 
and  this  brings  a  speculative  element  into  the  transaction. 
Of  course,  stocks  are  not  all  equally  speculative.  Bank 
stocks,  for  example,  with  their  sworn,  pubhshed  state- 
ments, and  the  safeguard  of  government  inspection,  are 
not  to  be  classed  with  mining  stocks,  about  which  nothing 
published  is  ever  true,  and  of  which  no  inspection  is  ever 
disinterested. 

Another  vital  difference  between  bonds  and  stocks  is 
that  the  former  is  a  promise  to  pay  both  principal  and 
interest,  which  can  be  enforced  by  law,  whereas  stock 
promises  nothing.  In  other  words,  the  holder  of  a  bond 
becomes  a  creditor  of  the  makers  of  the  bond,  whereas 
the  holder  of  stock  becomes  a  part  of  the  company  issuing 
it,  and  to  that  extent  a  debtor  for  all  the  liabilities  of 
the  company.     In  some  cases  (notably  in  bank  stocks) 


396  INVESTMENTS. 

the  holder  of  the  stock  is  liable  for  as  much  again  as 
the  face  amount  of  the  stock. 

Railway  Stocks. — ^Among  stocks  railways  form  the 
largest  and  most  popular  class.  The  total  amount  of 
them  is  slightly  greater  than  that  of  railroad  bonds, 
viz.,  $5,742,000,000  in  1899,  while  the  dividends  paid 
amounted  to  $109,000,000,  or  1.90  per  cent.  In  such  a 
vast  total  there  is,  of  course,  great  variety,  grading  all 
the  way  from  first-class  to  worthless.  Most  of  them  are 
listed  on  the  New  York  Stock  Exchange — a  fact  which 
has  both  advantages  and  disadvantages  from  an  invest- 
ment standpoint.  The  chief  advantage  is  that  they  can 
be  readily  sold,  but  this  is  outweighed  by  the  fact  that 
they  can  be  as  readily  manipulated  for  stock- jobbing 
purposes.  As  a  class,  they  cannot  be  recommended  to 
investors  who  desire  something  that  they  can  "go  to  sleep 
on."  They  require  constant  and  intelligent  watching, 
and  only  those  who  are  capable  of  giving  that  to  them 
should  put  their  money  into  them. 

^'Trust"  Stocks. — Another  large  class  of  stocks  which 
has  come  into  special  prominence  in  the  last  few  years  is 
that  known  as  industrials,  which  are  chiefly  the  preferred 
and  common  stocks  of  the  large  corporations  commonly 
called  "trusts."  The  extravagant  way  in  which  most  of 
these  combinations  have  been  capitalized  has  filled  many 
conservative  minds  with  vague  forebodings  of  coming 
disaster — moral,  financial,  and  national — as  the  final  out- 
come of  the  movement.  But  we  should  not  confound  the 
manner  of  doing  a  thing  with  the  thing  itself.  We  may 
admit  that  the  promoter's  profit  has  been  the  chief  motive 
in  most  of  the  combinations,  that  capitalization  has  been 


INVESTMENTS.  397 

extravagant,  that  speculation  has  been  overstimulated, 
and  that  great  danger  exists  in  the  fact  that  the  caution 
which  should  control  the  investor  has  already  given  place 
to  the  craze  for  large  and  quick  returns.  But  the  move- 
ment itself  will  outlive  these  accompaniments,  if  it  is 
economically  sound,  and  if  it  leads  to  the  greater  and  eas- 
ier production  of  wealth. 

In  my  opinion  the  so-called  trusts  are  here  to  stay. 
The  college  presidents  may  rage  and  the  politicians  im- 
agine a  vain  thing,  but  no  law  can  be  formed  which  will 
make  it  a  crime  for  any  number  of  people  to  combine 
their  capital  and  ability  in  any  legitimate  business.  Laws 
have  been  and  should  be  enacted  for  the  regulation  of 
the  combinations,  for  greater  safeguards  to  the  investing 
public,  and  for  the  protection  of  competing  smaller  con- 
cerns against  monopoly. 

Compulsory  publicity  of  the  condition  of  the  corpora- 
tions will  go  a  long  way  in  the  right  direction;  but  all 
talk  of  stopping  the  movement  is  vain.  It  is  clearly  an 
economical  evolution  from  the  evils  of  excessive  compe- 
tition, and  much  can  be  said  in  its  favor.  Its  tendency 
is  toward  economy  of  production  by  the  saving  of  all 
wasteful  and  unnecessary  expense ;  and  this  is  in  harmony 
with  the  spirit  of  the  age,  which  is  ever  improving  on 
old  methods  and  machinery.  Its  tendency  is  always  to- 
ward a  larger  ownership  of  the  property  represented  by 
the  corporation  and  a  wider  distribution  of  the  profits. 
There  are  now  thousands  of  owners  where  there  were  but 
hundreds. 

Competition  is  now  between  nations  as  well  as  individ- 
uals.    Consolidations  have  had  their  share  in  placing  this 


398  INVESTMENTS. 

country  at  least  a  neck  ahead  of  our  greatest  competitors 
in  the  international  race.  How  they  will  affect,  or  be 
affected  by,  hard  times  remains  to  be  seen.*  It  is  proba- 
ble, however,  that  a  few  great  vessels  will  weather  a 
storm  better  than  many  small  craft. 

When  great  changes  are  going  on  it  is  natural  to  have 
some  apprehension  as  to  final  results  and  easy  to 
prophesy  evil.  When  Rowland  Hill's  pennypost  scheme 
had  gained  such  support  as  to  have  its  adoption  proposed 
in  Parliament,  Sir  Robert  Peel,  the  greatest  financial 
minister  of  his  day,  was  its  strongest  opponent,  and 
prophesied  nothing  but  loss  and  failure  as  results.  All  the 
great  movements  in  history  were  fiercely  opposed  by 
some  of  the  ablest  men  of  the  time  who  were  specialists 
on  the  particular  matter  in  question.  Looking  back  now, 
their  opposition  seems  absurd.  And  so  when  our  theor- 
etical economists  predict  disaster  from  this  movement,  I 
say  we  must  wait  and  see.  None  of  the  calamities  has 
happened  yet. 

A  great  railroad  resembles  a  modem  trust  in  many  re- 
spects. It  is  generally  controlled  by  one  man,  but  owned 
by  thousands.  It  pays  its  stockholders  better,  serves  the 
public  better,  advances  national  development  better,  and 
makes  transportation  vastly  cheaper  than  a  hundred 
small  roads  could  do.  In  fact,  the  industries  now  being 
combined  into  large  corporations  are  only  following  the 
example  of  the  railroads.  Of  course,  there  is  always  the 
danger  that  things  vnll  be  overdone  and  tendencies  car- 
ried too  far.  But  against  this  there  is  an  intelligent 
public  sentiment  which  wiU  have  to  be  reckoned  with.     I 


*  The  results   of  the   financial  depression   of  1907-08   in  the   United 
States  proved  the  wisdom  of  Mr.  Forgan's  forecast. 


INVESTMENTS.  399 

believe  the  so-called  trusts  will  live ;  but  they  will  live  only 
by  proving  that  their  existence  is  a  benefit  to  the  people 
and  not  a  curse.  This,  I  think,  they  will  be  able  and  wise 
enough  to  do. 

I  submit,  therefore,  that  the  field  for  investment 
known  as  "industrials"  should  not  be  passed  by  with  a 
timid  epigram,  but  is  fairly  entitled  to  consideration. 
Here,  even  more  than  elsewhere,  investigation  of  the 
facts,  guided  by  common-sense,  is  a  necessity.  The  com- 
mon stocks  composed  entirely  of  water  and  given  away  as 
a  bonus  to  help  sell  the  preferred  cannot  be  classed  as  in- 
vestments and  many  of  these  preferred  stocks  represent 
such  extravagant  capitalization  that  they  also  should  be 
avoided.  But  for  investors  capable  of  intelHgent  investi- 
gation before,  and  supervision  after,  purchasing  their  in- 
vestments some  of  the  preferred  industrials  offer  a  legiti- 
mate and  profitable  opportunity. 

I  have  in  mind  a  large  company  whose  products  are 
used  in  every  household  of  the  land.  It  is  provided  with 
sufficient  working  capital  so  that  it  is  never  a  borrower, 
and  it  has  no  bonds,  except  a  small  amount  existing  on 
some  of  the  plants  before  they  were  acquired,  which  can- 
not be  paid  until  they  mature.  It  has  earned  dividends 
on  its  preferred  and  common  stock  from  the  beginning, 
and  is  piling  up  a  good  reserve  fund  besides.  It  has  a 
staple  business  and  is  excellently  managed.  I  fail  to 
see,  therefore,  why  its  preferred  stock,  or  the  preferred 
stock  of  any  other  "industrial"  in  like  circumstances,  is 
not  a  safe  and  legitimate  investment  for  a  business  man 
capable  of  keeping  an  intelligent  supervision  of  his  af- 
fairs. 


400  INVESTMENTS. 

Miscellaneous  Stocks. — In  addition  to  these  great 
classes  there  are  miscellaneous  stocks  too  numerous  to  be 
here  discussed.  With  regard  to  them  as  to  all  other 
securities',  few  general  rules  for  insuring  safety  can  be 
stated.  My  object  in  this  discussion  has  been  simply  to 
hint  at  the  dangers  to  be  avoided,  and  to  suggest  the  lines 
of  investigation  to  be  followed  in  buying  the  common 
securities  which  our  market  offers. 

A  Safe  General  Rule. 

It  may  be  said,  however,  that  the  safest  general  rule 
is  to  be  content  with  a  moderate  rate  of  interest.  From 
3%  to  5  per  cent,  is  all  that  can  now  be  looked  for  in  se- 
curities which  will  require  no  watching  on  the  part  of  the 
holder.  One  per  cent,  more  return  on  an  investment 
usually  means  at  least  10  per  cent,  more  risk  of  losing  the 
principal.  The  days  of  large  returns  on  securities 
offered  to  the  general  public  are  over,  and  all  flaming  ad- 
vertisements or  well-written  circulars  which  promise  high 
rates  of  interest  should  be  passed  by  as  httle  better  than 
frauds. 

An  investor  should  never  allow  himself  to  be  hurried 
into  buying  anything  on  the  ground  that  if  he  does  not 
buy  at  once  the  opportunity  will  be  gonp.  He  should 
take  time  to  see  the  property  or  to  read  the  document. 
This  may  save  him  much  time,  worry,  and  loss.  It  is 
wise  not  to  put  too  many  eggs  into  one  basket,  and  not 
to  buy  when  everyone  else  seems  to  be  buying  the  same 
thing.  Above  aU,  he  should  never  expect  something  for 
nothing.  Anything  that  can  be  got  for  nothing  in  the 
business  world  is  pretty  sure  to  be  worth  nothing,  but  to 
cost  something  in  the  end. 


INVESTMENTS.  401 

The  rate  of  interest  on  investments  has  been  steadily 
decHning  for  many  years,  but  is  now,  in  my  opinion,  as 
low  as  it  is  likely  to  go  for  many  years  to  come.  We  are 
only  beginning  to  realize  the  tremendous  resources  of 
our  country,  and  until  they  have  been  fully  developed, 
capital  will  continue  to  bring  fair  returns. 


[.B.L.  Vol.  4—26 


after  date 


-191  ^- 

^pnmUae  to  pay  to  the  ord*r  of 


THE  FIRST   NATIONAL   BANK   OF  CHICAGO. 

at  iKar  bgux DOLLARS, 


far  value  received^  with  interest  at  the  ^Toie  of^ 


per  annum,,  after  ^ 


haainf  depoeiied  uxth  eaid  Bank  at  collateral  teeurity,  far  payment  of  this  -or  any  other  UatAlUy  «r 
.to  the  legal  holder  hereof,  due  or  to  become  due,  or  that  mafi  be  hereafter  eontraeted  ' 
I  follmetng  , 


The  market,  value  of  whici 
taTne  decline;  and  on  /al^ 
wUh  full  power  and  authority 


:  right  to  eall  for  additional  teeurity  tttauUT  A» 
■  shall  be  deemed  to  be  due  and  payable  on  demand, 
I  tell  and  assign  and  deliver  the  whole  of  laid  property,  or  any  part  thereof,  «»' 
any  additiant  thereto,  at  any  Broker^  Board,  or  at  publie  or  private  tale,  at  th» 
option  of  taid  legal  holder,  or  its  asngne,  and  with  the  right  to  be  purchasers  themselves ,  at  such 
•  publie  sale,  on  the  non-performance  of  this  promise,  or  the  non-paymtM  of  any  of  the 
eTiOoned,  or  at  any  time  or  times  thereafter,  Mthout  advertisement  or  notice.  And  after 
deducting  all  legal  or  other  costs  and  expenses  for  eoUeetion,  sale  and  delivery,  to  apply  the  residue  of  the 
proceeds  of  such  sale  or  tales  to  to  be  made,  to  pay  any,  either  or  all  of  said  liabilities,  as  said  legal  holder 
ehall  deem  proper,  returning  the  overplus  to  the  underdgned.  In  case  of  the  insolvency  of  the  undersigned, 
any  indebtedness  due  from  the  legal  holder  hereof  to  the  undersigned  may  Jie  appropriated  and  applied 
hereon  at  any  time,  as  well  before  as  after 


Collateral  Note. 


CHAPTER  XXI. 
THE  STOCK  EXCHANGE. 

BY  SEYMOUR  EATON. 

The  general  public  too  often  regard  the  stock  ex- 
change merely  as  a  noisy  congregation  of  brokers  who 
gamble  in  the  securities  of  government  and  corporations, 
under  the  guise  of  legitimate  business.  A  deeper  insight, 
however,  into  the  character  and  functions  of  these  in- 
stitutions will  show  the  important  part  which  they  play  in 
the  financial  mechanism  of  the  country. 

The  exchanges  of  the  world  are  instruments  of  enor- 
mous economic  value  in  subdividing  and  distributing  cap- 
ital and  in  directing  its  employment  in  great  commercial 
and  industrial  enterprises.  When  the  Wall  street  man 
goes  down  to  his  office  his  first  inquiry  is  for  the  two- 
o'clock  prices  on  the  stock  exchange  of  London,  which 
are  received  before  ten  o'clock  in  New  York.  The  quo- 
tations of  American  stocks,  with  the  accompanying  price 
of  consols  and  the  Bank  of  England  rate,  give  him  the 
financial  condition  abroad  translated  into  figures  by  the 
keenest  financiers. 

New  York  has  no  more  entertaining  public  exhibition 
than  its  Stock  Exchange.  The  visitor  who,  for  the  first 
time,  looks  down  from  a  gallery  upon  its  members  in 
the  act  of  transacting  business,  is  astonished  at  the  tur- 
moil and  confusion  he  witnesses. 

There  is  no  reason  why  bonds  and  shares  should  not 
be  pubKcly  dealt  in,  and  in  large  quantities,  as  well  as 

403 


404  THE   STOCK  EXCHANGE. 

dry  goods,  corn,  or  cotton.  But,  unfortunately,  few 
stock  exchanges  v  confine  their  transactions  to  ordinary 
legitimate  business. 

The  members  are  divided  into  two  classes — those  who 
execute  commissions  for  others,  and  those  who  deal  on 
their  own  account.  Among  the  latter  are  the  boldest  and 
sharpest  speculators  of  the  day.  You  will  look  in  vain  in 
the  quotations  for  the  stock  of  dozens  of  corporations 
whose  securities  are  among  the  choicest  investments.  It 
is  upon  fluctuations  that  stock  speculation  grows  strong, 
and  the  largest  profits  are  often  made  on  the  poorest 
stocks. 

In  London,  Paris,  Berlin,  Vienna,  and  New  York 
there  are  very  large  private  banking  institutions  which 
buy  and  sell  bonds  and  stocks  on  the  stock  exchanges  of 
the  world  on  commission.  These  great  financial  institu- 
tions negotiate  loans  for  governments  and  great  corpora- 
tions and  are  the  intermediaries  in  all  the  great  move- 
ments of  capital  from  one  country  to  another. 

The  London  Stock  Exchange  has  scarcely  more  than 
one  hundred  years  of  history.  In  the  early  part  of  the 
19th  century  the  elder  Rothschild  was  one  of  the  giants 
"on  'Change,"  and  it  was  in  this  business  that  he  amassed 
the  great  fortune  which  makes  the  name  of  his  house 
synonymous  with  money  power.  The  Exchange  occu- 
pies an  old  dingy  building  on  Capel  Court  close  to  the 
Bank  of  England.  The  membership  is  not  limited  to 
a  fixed  number,  as  in  Paris  and  New  York. 

One  of  the  marked  peculiarities  of  the  Stock  Ex- 
change of  London  is  the  distinction  between  those  who 
act  as  agents  for  the  public,  and  who  are  properly  called 


THE   STOCK   EXCHANGE.  405 

brokers^  and  those  who  do  business  on  their  own  account 
and  are  described  as  dealers  or  jobbers.  On  the  Paris 
Bourse  all  agents  are  strictly  forbidden  to  trade  on  their 
own  account.  The  New  York  members  who  operate  on 
their  own  account  are  called  room-traders  or  scalpers, 
whose  profits  or  losses  consist  in  quick  turns  made  during 
the  day.  They  endeavor  to  detect  immediate  monetary 
influences  without  considering  the  ultimate  tendency  of 
prices. 

Nominally  the  stock  exchanges  guard  the  public  inter- 
est in  declining  to  admit  to  their  regular  quotations  the 
stocks  of  questionable  enterprises.  Before  any  shares, 
bonds,  or  debentures'  can  be  quoted  in  the  official  lists, 
application  must  be  made  in  behalf  of  such  issues  and 
their  bona  fide  character  must  be  established. 

The  membership  of  the  New  York  Exchange  is 
limited  to  about  1,100  and  seats  becoming  vacant  by  re- 
tiring members  bring  prices  all  the  way  from  $20,000  to 
$75,000  each.  Stocks  and  bonds  sold  in  the  retgular  way 
are  deliverable  to  the  buyer  during  exchange  hours  on 
the  following  day.  Transactions  are  quickly  collated 
^nd  rapidly  reported  to  the  outside  world. 

In  hundreds  of  offices  in  New  York  City  and  in  other 
American  cities  can  be  seen  a  little  instrument  called  a 
ticker,  which  automatically  prints  abbreviated  names  of 
stocks,  with  their  prices,  on  a  narrow  ribbon  of  paper. 
These  tickers  are  rented  to  these  offices,  as  are  telephones, 
by  the  local  telegraph  companies,  and  as  fast  as  the  sales 
are  made  the  quotations  are  ticked  off  in  thousands  of 
offices  in  all  parts  of  the  United  States. 


406  THE  STOCK  EXCHANGE. 

There  are  many  exchange  institutions  in  the  country. 
Nearly  every  large  city  has  its  stock  exchange,  and 
scattered  in  trade  centers  are  cotton  exchanges,  produce 
exchanges,  petroleum  exchanges,  mining  exchanges,  etc. 

Technical  Terms  of  Stock  Exchanges. 

The  term  hull  is  apphed  to  those  who  are  purchasers 
of  stock  for  long  account,  with  the  purpose  of  advancing 
prices,  as  the  tendency  of  a  bull  is  to  elevate  everything 
within  his  reach.  The  term  bear  is  apphed  to  those  who 
sell  stock  short,  with  the  purpose  of  depreciating  values. 
The  bear  operates  for*a  decline  in  prices.  To  buy  one 
stock  and  sell  another  with  the  expectation  that  the  one 
bought  will  advance  and  the  one  sold  will  decline,  is  a 
hedge.  The  broker's  charge  for  his  services  is  called  a 
commission^  which  in  the  New  York  Stock  Exchange  is 
one-eighth  of  one  per  cent,  each  way  on  the  par  value  of 
the  security  purchased  or  sold.  A  point  means  one  per 
cent,  on  the  par  value  of  a  stock  bond. 

Stock  privileges  or  puts  and  calls  are  extensively  dealt 
in  abroad  and  to  some  extent  here.  A  put  is  an  agree- 
ment in  the  form  of  a  written  or  printed  contract  filled 
out  to  suit  the  case,  whereby  the  signer  of  it  agrees  to  ac- 
cept upon  one  day's  notice,  except  on  the  day  of  expira- 
tion, a  certain  number  of  shares  of  a  given  stock  at  a 
stipulated  price.  A  call  is  the  reverse  of  a  put^  giving 
its  owner  the  right  to  demand  the  stock  under  the  same 
conditions.  A  put  may  serve  as  an  insurance  to  an  in- 
vestor against  a  radical  decline  in  the  value  of  stock  he . 
owns ;  a  call  may  be  purchased  by  a  man  whose  property 
is  not  immediately  available,  but  who  may  desire  to  be 
placed  in  a  position  to  procure  the  shares  at  the  call  price. 


THE  STOCK  EXCHANGE.  407 

if  they  are  not  below  that  in  the  open  market  when  he  se- 
cures the  necessary  funds. 

The  speculator  usually  trades  on  margins.  If  he  has 
$500  to  invest  he  buys  $5,000  worth  of  stock,  his  $500 
being  ten  per  cent,  of  the  total  amount.  He  expects  to 
sell  again  before  the  remaining  amount  falls  due.  The 
margin  is  usually  placed  by  the  speculator  in  the  hands 
of  a  broker  as  a  guaranty  against  loss.  Although  these 
brokers  are  really  agents  for  others,  yet  on  ^Change  they 
stand  in  the  mutual  relationship  of  principals.  A  margin 
is  merely  a  partial  payment,  but  a  broker  buying  stock 
for  a  client  on  margin  is  compelled  to  wholly  pay  for  it. 
If  he  has  not  the  Jiecessary  capital  his  usual  custom  is  to 
borrow  from  banks  or  money-lenders,  pledging  the  stock 
jBLS  collateral  security. 

On  foreign  exchanges  the  element  of  credit  enters 
more  largely  into  the  conduct  of  business.  Where  the 
credit  of  the  client  in  London  is  established,  his  broker 
does  not,  ordinarily,  call  on  him  for  any  cash  until  the 
next  "settlement  day." 

There  are  a  variety  of  methods  of  securing  what  is 
called  a  corner _,  that  is,  a  controlhng  interest  in  market- 
able stocks  which  others  are  compelled,  owing  to  pre- 
viously made  contracts,  to  buy.    ^ 

A  syndicate  is  a  party  of  capitalists  who  unite  their 
resources  to  accomplish  some  financial  object,  such  as  the 
purchase  of  a  property,  a  public  loan,  an  issue  of  bonds 
or  stocks,  or  any  other  undertaking  requiring  large  capi- 
tal. A  pool  is  in  some  respects  similar  to  a  syndicate. 
The  funds  of  individuals  are  put  into  a  common  under- 
taking with  a  view  of  manipulating  particular  securities 


408  THE   STOCK   EXCHANGE. 

and  dividing  the  profits.  It  savors  of  speculation  if  not 
of  gambling. 

A  boom  is  an  expansion  of  credit  and  a  large  inflation 
of  value.  A  panic  is  an  unusual  fright  among  specula- 
tors which  reduces  prices  and  causes  a  general  collapse  of 
credit.    A  small  boom  is  called  a  flurry. 

The  rules  of  the  exchanges  of  New  York  forbid  trad- 
ing after  closing  hours,  but  in  times  of  great  financial 
excitement  business  overflows  into  the  streets  and  hotels 
and  is  called  trading  on  the  curb.  A  wash  sale  is  a  ficti- 
tious transaction  made  by  two  members  acting  in  collu- 
sion, for  the  purpose  of  swelling  the  volume  of  apparent 
business  in  a  security,  and  thus  giving  a  false  impression 
of  its  value. 

Stocks  sell  dividend-on  between  the  time  the  dividend 
is  declared  and  the  day  the  books  of  the  company  close  for 
transfer;  after  that  they  sell  ex-dividend,  in  which  case 
the  dividend  does  not  go  to  the  buyer.  When  a  com- 
pany decides  not  to  declare  a  dividend  it  is  said  to  pass 
its  dividend. 

To  sell  stock  buyer  3  is  to  give  the  buyer  the  privilege 
of  taking  it  on  the  day  of  purchase,  or  on  any  of  the  three 
following  days,  without  interest;  and  to  sell  stock  seller 
3  is  to  give  the  seller  the  privilege  of  delivering  it  on  the 
day  of  purchase,  or  on  any  one  of  the  three  following 
days,  without  interest.  Buyer  5  is  a  little  lower,  and 
seller  3  a  httle  higher  than  regular  way  when  the  market 
is  in  a  normal  condition. 

Bucket-shops  are  establishments  conducted  nominally 
for  the  transaction  of  a  stock-exchange  business,  but 
really  for  the  registration  of  bets  or  wagers,  "usually 
for  small  amounts,  on  the  rise  or  fall  of  the  prices  of 


THE  STOCK  EXCHANGE.  409 

stocks,  there  being  no  transfer  or  delivery  of  the  com- 
modities nominally  dealt  in.  There  were  thousands  of 
these  counterfeit  concerns  throughout  the  country  con- 
ducted without  any  regard  for  legitimate  commercial 
enterprises. 

Brokers. 

Brokers  are  persons  employed  as  middlemen  to  trans- 
act business  or  negotiate  bargains  between  merchants  or 
individuals.  There  are  bill  or  exchange  brokers  who  buy 
and  sell  foreign  bills;  note  brokers  who  deal  in  promis- 
sory notes;  stock  brokers  who  buy  and  sell  stocks  for 
others;  ship  brokers  who  buy  and  sell  cargoes  in  transit 
or  upon  arrival;  insurance  brokers  who  are  middlemen 
between  the  insurance  companies  emd  the  insured ;  custom 
house  brokers  who  act  for  merchants  in  getting  con- 
signments through  the  custom  house;  and  brokers  in 
cattle,  in  dry  goods,  in  coffee,  in  cotton,  in  drugs,  in  flour, 
in  grain,  in  hides,  in  oil,  in  real  estate,  in  sugar,  in  to- 
bacco, in  wool ;  in  everything  or  anything  that  is  bought 
or  spld  in  large  quantities. 

By  attending  to  one  class  of  business  constantly  brok- 
ers acquire  a  more  intimate  knowledge  of  its  various  de- 
tails, of  the  houses  from  which  to  buy,  of  the  best  mar- 
ket for  sales,  and  of  the  credit  of  those  engaged  in  it, 
than  could  possibly  be  expected  of  a  general  merchant. 

The  large  manufacturers  living  outside  of  the  great 
centers  find  it  to  their  advantage  to  engage  brokers  to 
buy  their  raw  material  for  them,  so  we  find  that  each 
broker  has  his  regular  customers,  and  for  a  small  com- 
mission he  goes  into  the  market  and  buys  or  sells  as  care- 
fully as  though  he  were  spending  his  own  money.  It  is 
for  these  reasons — from  a  sense  of  the  advantages  to 


410  THE  STOCK  EXCHANGE. 

be  derived  from  using  brokers  in  the  transaction  of  busi- 
ness— that  they  are  so  extensively  employed  in  New 
York,  Chicago,  London,  and  other  great  cities. 

In  France  the  brokers  are  called  agents  de  change,  and 
their  number  in  Paris  is  limited  to  sixty.  They  are 
severally  obhged  to  give  bonds  for  the  prevention  of 
abuses,  and  are  not  allowed  to  charge  more  than  a  fixed 
rate  of  commission. 

Stock  Companies. 

To  organize  a  stock  company  it  is  necessary  for  a 
number  of  persons  to  come  together  and  make  a  certi- 
ficate to  the  effect  that  they  propose  to  form  a  company 
to  bear  a  certain  name,  for  the  purpose  of  transacting  a 
certain  kind  of  business  at  a  certain  place.  The 
certificate  states  that  they  propose  to  issue  a  certain 
number  of  shares  of  stock  at  a  certain  price  per  share, 
that  the  capital  stock  is  to  be  a  certain  amount,  and  that 
the  company  is  to  continue  to  exist  for  a  definite  period 
of  time.  Blank  forms  for  such  certificates  are  suppHed 
by  the  secretary  of  the  state  where  the  company  is  being 
organized  and  when  properly  filled  out,  signed,  and  de- 
livered to  him,  he  issues  a  license  or  charter  to  the  persons 
making  such  certificate,  giving  them  permission  to  op^ 
books,  sell  stock,  and  carry  on  the  enterprise  outlined. 
State  laws  regarding  stock  companies  differ  very 
largely. 

Shares  of  Stock. 

The  usual  par  value  of  a  share  of  stock  is  $100.  That 
is,  if  a  company  organize  with  a  capital  of  $50,000,  they 
will  have  500  shares  to  sell.  Each  person  who  buys  or 
subscribes  for  the  stock,  that  is,  who  joins  the  company, 


THE   STOCK  EXCHANGE.  411 

receives  a  certificate  of  stock.  These  certificates  are 
transferable  at  the  pleasure  of  the  owners.  The  transfer 
is  made  by  a  form  of  indorsement  on  the  back  of  the 
certificate. 

The  men  subscribing  in  this  way  become  responsible 
for  the  good  management  of  the  business,  and  are 
obliged  to  act  according  to  the  laws  of  the  state  in  which 
the  company  is  organized.  Usually  they  are  responsible 
individually  for  the  liabilities  if  the  concern  should  be- 
come bankrupt. 

Every  person  who  subscribes  owns  a  part  of  the  bus- 
iness and  is  called  a  shareholder.  All  the  shareholders 
must  meet  together,  and  out  of  their  number  they  choose 
a  certain  number  of  directors.  The  directors  choose  a 
president  and  other  necessary  officers  and  fix  the  amount 
of  salary  which  shall  be  paid  such  officers  for  their 
work.  As  a  rule  directors  have  no  salaries  attached  to 
their  positions.  A  regular  meeting  of  all  the  sharehold- 
ers is  held  at  least  once  a  year  to  elect  the  directors  and 
hear  the  reports  of  the  officers.  It  is  necessary  to  file  a 
statement  of  resources  and  liabilities  each  year  with  the 
secretary  of  state.  Corporations  are  now  also  required  to 
file  a  statement  of  their  affairs  with  the  collectors  of  in- 
ternal revenue. 

Capital  Stock  Increased. 
The  capital  stock  of  a  concern  may  be  increased  or 
diminished  by  a  vote  of  the  majority  of  the  stockholders 
representing  a  majority  of  the  stock. 

Preferred  Stock. 
The  preferred  stock  of  a  corporation  is  given  to  secure 
some  obligation  of  the  company  and  upon  it  dividends 


412  THE   STOCK   EXCHANGE. 

are  declared  in  preference  to  common  stock.  That  is  to 
say,  if  a  man  holds  a  share  of  preferred  stock  he  will 
receive  interest  thereon  out  of  the  profits  of  the  business 
before  such  profits  are  given  in  the  form  of  dividends  to 
shareholders  generally. 

Dividends. 

The  directors  of  a  company  after  paying  the  expenses 
and  laying  by  a  certain  amount  for  contingencies,  divide 
the  profits  among  the  shareholders.  These  profits  are 
called  dividends,  and  in  well  managed  companies  the 
dividends  which  are  declared  quarterly,  semi-annually, 
or  annually  usually  amount  to  good  interest  on  the  share- 
holder's investment. 

Surplus  Fund, 

It  is  not  customary  to  pay  a  larger  dividend  than 
good  interest  on  the  investment.  In  some  states  some 
classes  of  corporations  are  not  permitted  to  declare  div- 
idends larger  than  a  fixed  amount.  The  profits  remain- 
ing after  expenses  and  dividends  are  paid  are  credited 
to  what  is  called  a  surplus  fund.  This  fund  is  the  prop- 
erty of  the  shareholders  and  is  usually  invested  in  good 
securities. 

Treasury  Stock. 

It  often  occurs  that  a  new  company  finds  it  necessary 
to  set  aside  a  certain  number  of  shares  to  be  sold  from 
time  to  time  to  secure  working  capital.  Such  stock  is 
held  in  the  treasury  until  it  is  needed  and  is  called  treas- 
ury stock. 

Guaranteed  Stock. 

When  a  stock  is  issued,  upon  which  a  certain  dividend 
is  guaranteed  it  is  called  guaranteed  stock. 


THE   STOCK  EXCHANGE.  413 

Watered  Stock. 
When  stock  is  issued  to  the  shareholders  without  in- 
crease of  actual  capital  the  stock  is  said  to  have  been 
watered.  A  company  may  organize  for  say  $5,000  and 
may  want  to  increase  to  $50,000  without  adding  to  the 
number  of  its  shareholders.  Each  holder  of  one  share 
will  in  this  instance  receive  nine  new  shares,  and  in  future 
instead  of  receiving  a  dividend  on  one  share  he  will  re- 
ceive a  dividend  on  ten  shares. 

Limited  Liability  Companies. 
When  the  name  Limited  is  affixed  to  a  stock  com- 
pany's name,  it  signifies  that  each  shareholder  is  individ- 
ually liable  to  the  creditors  of  the  company  for  only  the 
amount  representing  the  value  of  the  shares  held  by  him. 
When  the  word  Limited  is  not  attached,  it  is  understood 
that  it  is  a  full  liability  company  in  which  each  share- 
holder is  individually  liable  to  the  creditors  of  the  com- 
pany. If  a  man  should  buy  five  shares  in  a  limited  com- 
pany and  the  company  should  fail,  for  say  $20,000,  the 
creditors  could  compel  him  to  pay  only  the  amount  sub- 
scribed, namely  $500.  In  ordinary  companies  he  could 
be  compelled  to  pay  the  entire  indebtedness  if  the  amount 
could  not  be  secured  from  the  shareholders  generally. 
Understand  clearly  that  the  name  Limited  printed  after 
the  name  of  a  company ,^  and  which  is  required  there  by 
law,  does  not  indicate  in  any  way  that  the  capital  oi* 
credit  of  the  company  is  limited. 

Sale  of  Stock. 

Stock  is  usually  sold  on  certain  explicit  conditions, 
such  as  the  paying  of  ten  per  cent,  down  and  the  balance 
at  stated  intervals.    If  the  conditions  which  are  agreed 


414  THE  STOCK  EXCHANGE. 

to  by  the  shareholder  are  not  met  his  stock  is  declared 
forfeited,  or  he  can  be  sued  in  the  same  manner  as  upon 
any  other  contract.  Some  companies  organize  with  the 
understanding  that  a  certain  percentage  of  the  nominal 
value  of  the  shares  is  to  be  paid  at  the  time  of  subscrib- 
ing, and  that  future  payments  are  to  be  made  at  such 
times  and  in  such  amounts  as  the  company  may  require. 
Under  these  conditions  the  stockholders  are  assessed 
whenever  money  is  needed  to  pay  the  company's  ex- 
penses. Such  assessments  are  uniform  on  all  stock- 
holders • 


or  WLL  0«  MOTC  . 


Tht  (ban  onaed  place*  being  the 
Taatlinony  Wharaof,  I  bare 


place*  oi  leudence  fopectinlj  oi  the  penoa*  to  whom 
t  1117  band  and  aSxed  my  official  leal  the  dajr  and  jrear  1 


inch  Nocice  wa*  directed. 


Jfotary  PuMie. 


PBES-NoUac  for  TrauM,  a 


Notice  of  Protest. 


FIRST  NATIONAL  BANK 


OFCHfCACO 


DfoMiJfor^aamttf 


Deposit  Slip. 


Questions 

FOR 

Review 


l.B.L.  V^ol.  4—27 


BANKING  AND  FINANCE 

QUESTIONS  FOR  REVIEW. 

CHAPTER  I. 

Origin  and  Use  of  Money. 

1.  What  is  the  true  function  of  money  and  how  early 
in  history  was  it  understood? 

2.  What  were  the  earliest  mediums  of  exchange? 

3.  What  is  the  reason  for  the  use  of  metal  as  money? 

4.  What  is  the  nature  of  the  first  stamped  metals? 

5.  Who  first  coined  money  under  the  Romans? 

6.  What  was  the  origin  of  the  Enghsh  pound  ster- 
ling? 

7.  Has  the  proportion  between  the  pound,  the  shill- 
ing, and  the  penny  always  been  uniform?  How  about 
the  proportionate  value  of  these  coins? 

8.  What  causes  have  contributed  to  the  diminish- 
ment  of  the  real  quantity  of  valuable  metal  contained  in 
coins? 

9.  What  two  different  meanings  are  attached  in 
economics  to  the  word  "value"? 

10.  Show  how  many  things  which  have  the  greatest 
value  in  use  have  frequently  little  or  no  value  in  ex- 
change, and  vice  versa. 

CHAPTER  II. 

The  Function  of  Banks. 

1.  What  are  the  functions  of  a  banker,  broadly 
speaking? 

2.  Into  what  classes  are  banks  divided? 

419 


420  QUESTIONS  FOR  REVIEW. 

3.  What  are  the  principal  features  of  the  business 
of  banking? 

4.  What  funds  constitute  the  disposable  means  of  a 
bank? 

5.  How  are  these  disposable  means  employed? 

6.  How  may  the  expenses  of  a  bank  be  classified? 

7.  How  are  the  profits  of  a  bank  reckoned? 

8.  Give  a  definition  of  a  bank  in  commercial  lan- 
guage. 

9.  How  is  a  public  bank  generally  regulated? 

10.  What  is  the  nature  of  a  private  bank? 

11.  What  is  the  security  of  those  who  transact  busi- 
ness with  a  private  bank? 

12.  What  feature  constitutes  the   great  utility  of 
banking  establishments  in  commercial  countries? 

CHAPTER  III. 

The  Origin  of  Banking. 

1.  What  is  the  earliest  evidence  that  ancient  money 
changers  allowed  interest  on  funds  lodged  in  their 
hands? 

2.  What  form  of  banks  existed  in  ancient  Greece? 
3    What  methods  were  employed  by  the  Athenian 

bankers? 

4.  Where  do  we  find  the  first  historic  suggestion  for 
the  estabhshment  of  a  joint-stock  bank? 

5.  What  were  the  bankers  and  banking  houses  of 
ancient  Rome  called? 

6.  How  were  the  Roman  bankers  connected  with 
the  state? 


QUESTIONS  FOR  REVIEW.  421 

7.  What  is  the  popular  origin  of  the  word  "bank"? 

8.  What  other  derivation  of  the  word  bank  has  re- 
ceived support? 

9.  How  did  the  Florentine  bankers  of  Italy  achieve 
their  reputation? 

10.  Where  was  the  first  national  bank  founded  in 
Europe,  and  when? 

11.  What  were  the  characteristics  of  the  Bank  of 
Venice? 

12.  When  were  the  first  bills  of  exchange  employed 
in  commerce? 

13.  When  was  the  Bank  of  Amsterdam  established 
and  to  what  cause  is  its  origin  ascribed? 

14.  What  is  the  meaning  of  the  term  agio  ? 

15.  What  was  the  general  rate  of  the  agio  of  Am- 
sterdam? 

16.  How  was  the  Bank  of  Amsterdam  managed? 

17.  When  was  the  Bank  of  North  America  estab- 
lished, and  on  what  plan? 

CHAPTER  IV. 

Early  Banking  in  England.  ^ 

1.  What  are  the  four  principal  branches  of  the 
business  of  modern  banking? 

2.  When  was  gold  first  coined  in  England  and  when 
did  it  enter  permanently  into  currency? 

3.  What  was  the  function  of  the  office  of  Royal  Ex- 
changer? 

4.  Why  was  this  office  re-established  by  Charles 
I? 


422  QUESTIONS  FOB,  REVIEW. 

5.  When  did  the  business  of  money-changing  fall 
into  the  hands  of  the  goldsmiths  of  London? 

6.  ,  Why  was  the  business  of  money-lending  conduct- 
ed during  the  Middle  Ages  under  severe  restraints? 

7.  When  do  we  find  the  earhest  mention  in  English 
history  of  a  market  rate  of  interest? 

8.  Who  were  the  principal  money-lenders  in  Eng- 
land during  the  evolution  of  banking? 

9.  Who  were  the  Lombards,  and  what  was  their 
connection  with  English  banking? 

10.  When  was  the  taking  of  interest  for  money  made 
legal  in  England,  and  at  what  rate? 

11.  When  did  the  borrowing  of  money  by  bankers 
for  loaning  purposes  originate? 

12.  What  was  the  nature  of  the  "goldsmiths'  notes." 
the  first  kind  of  notes  issued  in  England? 

13.  How  long  did  the  business  of  banking  remain  en- 
tirely in  the  hands  of  the  so-caUed  "new-fashioned"  bank- 
ers? 

14.  How  was  the  transmission  of  money  effected 
during  the  Middle  Ages? 

15.  When  was  the  Bank  of  England  established? 

16.  What  objections  were  raised  to  its  establishment? 

17.  How  is  the  Bank  of  England  governed? 

18.  How  is  the  English  bank  rate  of  discount  fixed? 

CHAPTER  V. 

The  Utility  of  Banking. 

1.  What  was  the  first  consideration  that  gave  rise 
to  the  business  of  banking? 

2.  What  evils  are  obviated  by  means  of  banking? 


QUESTIONS  FOR  REVIEW.  423 

3.  In  what  way  does  banking  increase  the  produc- 
tive capital  of  a  nation? 

4.  What  advantages  are  secured  to  persons  engag- 
ed in  trade  and  commerce,  by  means  of  banking? 

5.  How  does  the  institution  of  banking  facilitate  the 
transmission  of  money? 

6.  In  what  way  does  banking  save  the  time  and  ex- 
pense of  a  merchant  or  retail  tradesman? 

7.  How  do  banks  aid  business  men  by  acting  as 
references  for  them? 

8.  Show  how  the  system  of  paying  by  means  of 
checks  enables  one  to  preserve  a  record  of  expendi- 
tures. 

9.  What  effect  has  banking  upon  the  morals  of  so- 
ciety? 

10.     How  do  banks  aid  business  by  the  dissemination 
of  useful  information? 

CHAPTER  VI. 

The  Methods  of  Banking.  ^ 

1.  What  are  the  respective  duties  of  the  ordinary 
officers  of  a  bank? 

2.  What  qualities  are  particularly  desirable  in  a 
bank  clerk? 

3.  What  is  the  actual  usable  cash  of  a  bank  repre- 
sented by? 

4.  What  are  the  regulations  regarding  the  redemp- 
tion of  mutilated  bills. 

5.  In  what  form  are  United  States  notes  printed? 

6.  What  is  meant  by  "accurate"  interest? 


424  QUESTIONS  FOR  EETCEW. 

7.  What  is  the  character  of  the  great  bulk  of  the 
loans  made  by  banking  institutions? 

8.  What  is  the  nature  of  a  trust  company? 

9.  What  is  the  advantage  to  the  business  community 
of  safe-deposit  vaults? 

10.  What  kind  of  bond  is  usually  given  by  bank 
clerks  and  officers? 

11.  What  kind  of  currency  is  often  issued  during 
periods  of  financial  stringency? 

CHAPTER  VII. 

The  Clearing-house  System. 

1.  What  is  the  object  of  the  modern  clearing-house 
system? 

2.  Where  do  we  find  the  final  clearing-house  of  the 
world? 

3.  What  is  the  daily  amount  of  the  bank  clearings 
in  New  York  City? 

4.  Sketch  briefly  the  daily  operations  of  a  clearing- 
house in  a  large  city? 

5.  What  kind  of  rules  are  established  by  clearing- 
houses to  prevent  errors? 

6.  Where  did  the  clearing-house  idea  originate? 

7.  For  what  other  purposes  besides  banking  is  the 
clearing-house  principle  used  in  England? 

CHAPTER  VIII. 

Deposits  and  Depositors. 

1.  What  course  is  followed  by  a  business  man  in 
opening  an  account  in  a  bank? 

2.  What  is  the  nature  of  a  check  ? 


QUESTIONS  FOR  REVIEW.  425 

8.     What  is  the  purpose  of  the  depositor's  bank- 
book? 

4.  Who  is  responsible  for  any  loss  in  case  of  the 
fradulent  "raising"  of  a  check? 

5.  Is  a  check  dated  on  Sunday  good? 

6.  Is  a  note  executed  on  Sunday  good? 

7.  Must  a  check  necessarily  be  written  on  a  print- 
ed form? 

8.  Why  should  a  check  usually  be  drawn  "to  order"  ? 

9.  Is  it  ever  a  good  plan  to  place  the  address  of  the 
payee  on  the  face  of  a  check? 

10.  What  is  the  correct  method  of  indorsing  a  check? 

11.  How  would  you  write  a  check  to  draw  money  for 
wages  of  employees? 

12.  How  would  you  draw  cash  for  your  own  use  ? 

13.  If  you  have  power  of  attorney  to  indorse  for  a 
person,  how  do  you  sign  your  name  ? 

14.  Is  a  stamped  indorsement  of  a  check  as  good  as 
a  written  one? 

15.  What  should  be  done  in  case  a  check  is  returned 
marked  "no  funds"? 

16.  How  are  checks  "certified"? 

17.  What  is  meant  by  "kiting"  checks? 

18.  What  is  the  best  form  of  signature  for  a  check, 
and  the  kind  most  difficult  to  forge? 

CHAPTER  IX. 

Notes  and  Drafts. 

1.  What  is  the  nature  of  a  promissory  note? 

2.  What  is  meant  by  the  day  of  maturity  of  a 
note? 


426  QUESTIONS  FOa  REVIEW. 

3.  What  are  "days  of  grace"  ? 

4.  Are  the  words  "Value  received"  legally  necessary 
on  a  promissory  note? 

5.  What  is  meant  by  "acconmiodation  paper"  ? 

6.  Can  a  third  party  or  innocent  holder  of  a  note 
recover  its  value  even  though  it  was  illegally  given,  with- 
out a  valuable  consideration? 

7.  When  does  a  note  draw  interest  before  maturity? 

8.  What  is  the  signification  of  indorsing  a  note? 

9.  What  is  the  object  of  writing  the  words  "With- 
out recourse"  before  or  after  an  indorser's  name? 

10.  When  should  notes  be  presented  for  payment? 

11.  What  is  meant  by  "protesting"  a  note? 

12.  What  is  the  form  of  a  protest  notice? 

13.  What  course  should  be  followed  after  a  payment 
is  made  to  apply  on  a  note? 

14.  What  is  the  effect  of  the  indorsement  of  a  par- 
tial payment  on  the  back  of  a  note? 

15.  What  is  the  nature  of  a  joint  note ? 

16.  What  is  the  usual  form  of  a  commercial  draft? 

17.  How  are  commercial  drafts  usually  collected? 

18.  What  is  the  advantage  of  making  collections  by 
draft? 

19.  When  should  bills  receivable  and  commercial 
drafts  be  placed  with  a  bank  for  collection? 

20.  What  is  meant  by  a  three-party  draft? 

21.  What  is  the  meaning  of  the  slip  with  the  words 
"No  protest"  often  attached  to  the  end  of  a  draft? 

22.  What  are  the  advantages  of  taking  a  note  from 
a  debtor? 

23.  What  is  meant  by  discounting  a  note  or  draft? 


QUESTIONS  FOR  REVIEW.  427 

24.     How  are  commercial  drafts  used  in  comiection 
with  bills  of  lading? 

CHAPTER  X. 

Credit  and  Exchange. 

1.  What  is  the  great  f miction  of  credit  in  modern 
business  ? 

2.  How  large  a  portion  of  the  business  of  the  world 
is  done  on  a  credit  basis? 

3.  Name  a  modern  instance  of  contract  credit  obli- 
gations being  exchanged  without  giving  any  evidence 
of  the  debt. 

4.  What  is  the  origin  of  the  credit  instruments 
which  have  developed  into  biUs  of  exchange? 

5.  When  were  such  bills  first  used,  and  in  what 
form? 

6.  What  is  meant  in  commerce  by  the  term  "ex- 
change"? 

7.  Give  an  illustration  of  the  convenience  of  ex- 
change. 

8.  What  is  meant  by  the  par  of  the  currency  of  any 
two  countries? 

9.  What  is  the  par  of  exchange  between  Great 
Britain  and  the  United  States? 

10.  What  do  we  mean  when  we  say  that  exchange 
is  "in  favor  of"  London  or  Paris? 

11.  What  causes  fluctuations  in  the  price  of  gold? 

12.  Why  are  the  imports  and  exports  of  bullion  the 
real  test  of  exchange  between  two  countries? 

13.  Under  what  conditions  is  it  advantageous  to  a 


428  QUESTIONS  FOR  REVIEW. 

New  York  merchant  to  pay  a  debt  in  London  by  sending 
the  actual  coin  across? 

14!.  When  would  it  be  to  his  advantage  for  a  New 
York  merchant  to  buy  a  bill  in  London  to  pay  a  debt  in 
Berlin? 

15.  To  what  extent  is  the  rate  of  exchange  affected 
by  the  balance  of  trade? 

16.  Name  some  other  conditions  that  affect  the  rate 
of  foreign  exchange. 

17.  In  what  respects  does  the  principle  of  domestic 
exchange  differ  from  that  of  foreign  exchange? 

18.  Upon  what  should  the  rate  of  domestic  exchange 
be  based  under  normal  conditions? 

19.  When  is  it  cheaper  to  ship  gold  to  England  than 
to  buy  sight  bills? 

20.  What  facts  tend  to  make  the  city  of  London  the 
financial  center  of  the  world? 

21.  What  is  the  nature  of  a  "crossed"  check? 

22.  Why  should  Canadian  silver  coins  be  readily  ac- 
cepted at  par  in  the  United  States  ? 

23.  What  great  advantages  are  enjoyed  under  the 
Canadian  banking  system? 

24.  What  is  the  nature  of  a  letter  of  credit? 

25.  How  does  a  traveler  obtain  money  abroad  upon 
a  letter  of  credit? 

CHAPTER  XL 

Banking  in  Canada. 

1.  Show  how  systems  of  banking  are  governed  to  a 
considerable  extent  by  local  or  national  conditions. 

2.  Is  banking  in  Canada  in  any  sense  a  monopoly? 


QUESTIONS  FOR  EEVEEW.  429 

8.  Can  it  be  said  to  be  "free  banking"  as  understood 
in  the  United  States? 

4.  What  is  the  main  difference  between  the  methods 
of  the  United  States  and  of  Canada  in  the  matter  of 
obtaining  the  privilege  of  opening  a  bank? 

5.  What  is  meant  by  the  "double  liability"  of  share- 
holders in  banks? 

6.  What  advantages  accrue  to  the  public  from  the 
fact  that  the  capital  of  every  Canadian  bank  is  large  and 
the  number  of  banks  comparatively  small? 

7.  When  do  the  charters  of  the  Canadian  banks 
expire  and  what  is  the  renewal  period? 

8.  What  is  necessary  in  a  banking  system  to  answer 
the  requirements  of  a  rapidly  growing  country  and  yet 
be  safe  and  profitable? 

9.  Does  the  Canadian  system  possess  all  those  quali- 
ties? 

10.  Under  what  conditions  was  fiat  paper  money  for 
general  circulation  first  issued  in  Canada? 

11.  How  long  was  this  the  money  of  Canada  and 
^hat  resulted  from  its  use  ? 

12.  When  did  the  merchants  of  Quebec  and  Mon- 
treal begin  to  agitate  for  a  bank  of  issue? 

13.  When  was  the  first  joint-stock  bank  in  Canada 
created  and  under  what  title? 

14.  When  was  the  first  general  bank  act  of  the  Do- 
minion passed? 

15.  To  what  extent  are  Canadian  banks  empowered 
to  issue  circulating  notes? 

16.  What  are  the  distinctive  features  of  the  Canadian 
bank  note  issue? 

17.  How  are  bank  notes  secured  in  Canada? 


430  QUESTIONS  FOR  REVIEW. 

18.  What  feature  of  the  Canadian  bank  note  system 
of  issue  acts  as  a  safeguard  against  any  serious  inflation 
of  the  currency? 

19.  What  is  the  benefit  of  the  Canadian  branch  bank 
system  to  the  worthy  borrower,  as  compared  with  the 
United  States  national  banking  system? 

20.  What  increased  financial  facilities  for  marketing 
of  farm  products  were  provided  by  the  Canadian  Bank 
Act  of  1906? 

21.  Do  Canadian  banks  give  interest  on  active  cur- 
rent accounts? 

22.  What  reports  are  Canadian  banks  required  to 
make  to  the  Dominion  government? 

CHAPTER  XII. 

Bank  Credits. 

1.  When  did  the  introduction  of  credit  departments 
in  banks  become  general? 

2.  When  did  the  American  Bankers*  Association 
adopt  a  uniform  property  statement  blank  for  the  use  of 
borrowers  ? 

8.  When  did  the  National  Association  of  Credit 
Men  adopt  uniform  statement  blanks? 

4.  What  are  the  basic  principles  of  credit  science  as 
it  is  now  understood? 

5.  Why  is  it  now  more  imperatively  necessary  than 
ever  for  bankers  to  be  fully  informed  upon  the  credit  of 
borrowers? 

6.  Is  a  proper  "statement  of  condition"  of  any  value 
to  the  borrower  as  well  as  to  the  bank,  and  why? 

7.  What  are  the  requirements  of  a  modem  bank 
credit  department? 


QUESTIONS  FOR  REVIEW.  431 

8.  Why  is  it  necessary  that  a  statement  of  condition 
should  be  submitted  to  analysis? 

9.  Give  a  summary  of  the  principles,  mechanism, 
and  rules  of  credit  science. 

10.  What  is  the  nature  of  the  so-called  "50  per  cent, 
credit  rule"? 

11.  How  do  certified  public  accountants  and  engi- 
neers assist  the  credit  department? 

12.  About  what  percentage  of  commercial  loans  are 
made  by  banks  to  manufacturers?  to  commission  men? 
to  retailers? 

13.  What  distinction  is  made  by  banks  between 
"quick"  assets  and  "fixed"  assets? 

14.  What  is  the  average  proportion  of  quick  assets  to 
total  assets  of  manufacturers?  of  commission  men?  of 
retailers? 

CHAPTER  XIII. 

The  Comptroller's  Office. 

1.  What  are  the  general  duties  of  the  Comptroller 
of  the  Currency? 

2.  What  provisions  were  made  in  the  Act  of  1863 
for  keeping  the  office  of  Comptroller  out  of  politics? 

3.  Does  the  affiliation  of  the  office  with  the  Trea- 
sury Department  prevent  its  independence? 

4.  What  are  the  functions  of  the  organization  de- 
partment in  the  Comptroller's  office? 

5.  What  are  the  functions  of  the  redemption  de- 
partment? 

6.  What  is  the  function  of  the  issuing  department? 

7.  What  must  be  set  forth  in  the  apphcation  for  the 
creation  of  a  national  bank? 


432  QUESTIONS  FOE  REVIEW. 

8.  Are  the  great  powers  of  the  Comptroller  derived 
from  legislative  enactment  or  are  they  largely  assumed? 

9.  How  are  the  national  bank  examiners  appoint- 
ed? 

10.  What  are  the  duties  of  the  examiners? 

11.  To  whom  do  the  bank  examiners  report? 

12.  What  objections  have  been  urged  to  the  method 
of  issuing  bank  note  currency? 

13.  What  is  the  course  taken  by  the  Comptroller  if 
a  bank  impairs  its  capital? 

14.  In  what  respect  does  the  office  of  the  Comptroller 
differ  from  any  other  in  Washington? 

15.  What  responsibiHty  falls  upon  the  Comptroller 
with  respect  to  the  liquidation  of  the  bank's  assets? 

CHAPTER  XIV. 

Monetary  System  of  the  United  States. 
1. — Coinage  of  Gold  and  Silver. 

1.  What  were  the  bases  of  the  first  monetary  system 
of  the  United  States,  estabhshed  under  the  Act  of  April 
2,  1792? 

2.  What  coinage  was  provided  for  under  the  Act  of 
Congress  of  1873? 

3.  When  was  the  trade  dollar  retired  by  Congress 
and  its  coinage  prohibited? 

4.  When  was  the  coinage  of  $1  and  $3  gold  pieces 
discontinued  ? 

5.  To  what  amount  are  the  subsidiary  silver  coins  of 
the  United  States  legal  tender? 

6.  To  what  amount  are  nickel  and  copper  coin  legal 
tender?  ' 


QUESTIONS  FOR  REVIEW.  483 

7.  Why  was  the  ratio  of  15  to  1  adopted  by  Congress 
and  when  was  it  changed? 

8.  Has  the  so-called  double  or  bimetallic  standard 
ever  been  really  effective  in  the  United  States  ? 

9.  How  many  different  kinds  of  money  circulate  in 
the  United  States? 

10.  Under  what  conditions  is  gold  coin  legal  tender 
for  all  debts,  public  and  private? 

11.  Are  gold  certificates,  silver  certificates,  and 
national  bank  notes  receivable  for  all  public  dues? 

12.  What  is  the  weight  and  fineness  of  the  gold  unit 
of  value? 

13.  In  what  denominations  is  gold  now  coined  and 
what  are  the  coins  called  respectively? 

14.  What  proportion  of  the  gold  coins  struck  at  the 
mints  of  the  United  States  have  disappeared  from  circu- 
lation? 

15.  What  is  the  amount  of  fine  silver  and  the  amount 
of  alloy  in  the  silver  dollar?    What  alloy  is  used? 

16.  What  is  the  exact  present  coinage  ratio  between 
gold  and  silver? 

17.  During  what  period  in  United  States  history- 
was  there  no  fractional  silver  coin  in  circulation? 

18.  Of  what  did  the  small  change  of  the  country  con- 
sist during  this  period? 

19.  How  are  standard  silver  dollars  issued  by  the 
treasurer  and  assistant  treasurers  of  the  United  States? 

20.  What  were  the  provisions  of  the  Silver  Act  of 
1890? 

21.  Wbat  is  the  meaning  of  the  phrase  16  to  1  as  ap- 
plied to  coinage? 

I.B.L.  Vol.  4—28 


434  QUESTIONS  FOE  EEVIEW. 

22.  How  many  parts  of  pure  gold,  pure  silver,  and 
copper  alloy  are  there  in  standard  bullion? 

23.  What  are  the  coining  values  of  an  ounce  of  pure 
gold  and  an  ounce  of  pure  silver  respectively? 

24.  What  is  seigniorage? 

25.  Does  the  United  States  government  purchase 
gold  bullion?  , 

26.  Is  it  authorized  to  purchase  silver? 

27.  What  is  the  meaning  of  free  and  unlimited  coin- 
age of  gold  as  existing  in  the  United  States? 

28.  When  may  the  mints  lawfully  refuse  to  receive 
gold  bullion? 

29.  Under    what    conditions    is    subsidiary    silver 
coined? 

30.  What  was  the  purpose  of  the  trade  dollar  former- 
ly in  circulation? 

81.    What  is  the  meaning  of  the  free  and  unlimited 
coinage  of  silver? 

32.  May  coinage  be  unlimited  without  being  en- 
tirely free? 

33.  Are  national  bank  notes  redeemable  by  the  as- 
sistant treasurers  of  the  United  States? 

CHAPTER  XV. 

Monetary  System  of  the  United  States. 

2. — Paper  Money. 

1.  What  was  the  nature  of  the  first  paper  money 
ever  issued  by  the  government  of  the  United  States? 

2.  What  quaUties  prevented  the  depreciation  of 
this  currency  when  other  United  States  notes  depre- 
ciated in  value? 


QUESTIONS  FOK    lEVlEW.  435 

8,    Were  these  notes  ever  made  legal  tender? 

4.  When  were  the  well-known  "greenbacks"  or  "le- 
gal tenders"  issued,  and  in  what  quantity? 

5.  What  change  was  made  in  the  volume  of  United 
States  notes  outstanding  after  the  panic  in  1873? 

6.  What  were  the  provisions  of  the  Currency  Act 
of  March  14,  1900,  with  respect  to  United  States  notes? 

7.  When  were  gold  certificates  first  issued  and  when 
was  the  practice  temporarily  discontinued? 

8.  Under  what  conditions  can  the  Secretary  of  the 
Treasury  suspend  the  issue  of  gold  certificates? 

9.  When  was  the  issue  of  silver  certificates  of  the 
smaller  denominations  authorized? 

10.  What  do  the  silver  certificates  represent? 

11.  Are  silver  certificates  and  silver  dollars  redeem- 
able in  gold? 

12.  What  were  the  provisions  of  the  so-called  Sher- 
man Act  of  1890  with  regard  to  the  issue  of  Treasury 
notes  ? 

13.  What  was  the  effect  of  the  suspension  of  specie 
payments  about  January  1,  1862? 

14.  How  was  the  place  of  the  subsidiary  silver  coins 
supplied  by  those  whose  business  required  them  to  make 
change? 

15.  How  did  Congi:ess  meet  the  emergency? 

16.  What  was  the  highest  amount  of  fractional  paper 
currency  outstanding  at  any  time? 

17.  When  was  the  issue  of  circulating  notes  by  na- 
tional banking  associations  first  authorized? 

18.  What  were  the  provisions  of  the  National  Bank 
Act  of  March  14,  1900? 


436  QUESTIONS  FOR  EEVIEW. 

19.  Under  what  conditions  was  the  organization 
of  National  Currency  Associations  authorized  by  Con- 
gress? 

20.  What  is  the  security  required  from  banks  for 
their  circulating  notes  ? 

CHAPTER  XVL 

The  Federal  Reserve  System. 

1.  What  is  the  main  purpose. of  the  Federal  Reserve 
Bank  system? 

2.  How  many  Reserve  Districts  are  there,  and  where 
are  the  Reserve  Banks  located? 

3.  Who  are  the  depositors  in  a  Federal  Reserve 
Bank?    Who  are  the  shareholders? 

4.  From  what  sources  does  the  Reserve  Bank  derive 
funds  for  use  in  an  emergency? 

5.  How  are  panics  to  be  prevented  under  the  opera- 
tion of  the  Federal  Reserve  Act? 

6.  How  is  the  Federal  Reserve  Board  constituted, 
and  what  are  its  duties? 

7.  Ho\^^  many  members  constitute  the  Federal  Ad- 
visory Council,  and  what  are  its  duties? 

8.  How  are  the  executive  officers  of  a  Reserve  Bank 
appointed,  and  what  are  they  called? 

9.  In  what  way  does  the  new  law  operate  as  a  prac- 
tical guarantee  of  deposits  in  the  member  banks? 

10.  What  is  the  effect  of  the*  Federal  Reserve  Sys- 
tem on  mercantile  business  and  credit? 


QUESTIONS  FOR  REVIEW.  437 

CHAPTER  XVII. 

Monetary  Events  Since  1786. 

1.  In  what  year  was  the  double  standard  establish- 
ed in  the  United  States,  and  on  what  basis? 

2.  When  was  the  United  States  Mint  established? 

3.  In  what  year  was  the  double  standard  abolished 
in  England  and  the  gold  standard  adopted? 

4.  What  is  meant  by  "the  average  rate  for  silver  per 
ounce  standard"? 

5.  When  was  the  ratio  of  1  to  16  substituted  for  that 
of  1  to  15  in  the  United  States,  and  how  was  it  accom- 
plished? 

6.  In  what  years  were  the  gold  mines  of  CaKfomia 
and  AustraHa  discovered? 

7.  When  was  the  maximum  of  the  production  of 
gold  reached  in  California  and  what  was  its  value? 

8.  What  was  the  basis  of  the  Latin  Union  between 
France,  Belgium,  and  Switzerland,  and  when  was  it 
formed? 

9.  When  was  the  silver  standard  in  Germany  re- 
placed by  the  gold  standard? 

10.  What  important  monetary  events  occurred  in  the 
United  States  in  1873? 

11.  When  was  the  Scandinavian  Monetary  Union 
formed  and  what  was  its  basis? 

12.  What  were  the  provisions  of  the  United  States 
Silver  Coinage  Act  of  1878? 

13.  When  did  the  first  International  Monetary  Con- 
ference in  Paris  meet? 

14.  When  was  the  Bland  silver  law  in  the  United 
States  repealed  and  what  was  substituted  therefor? 


438  QUESTIONS  FOR  REVIEW. 

15.  What  was  the  amount  of  the  production  of  gold 
in  1892,  when  it  reached  its  maximum? 

16.  When  was  the  gold  standard  adopted  in  India? 
in  the  United  States?    in  Mexico?^ 

17.  When  was  the  National  Monetary  Commission 
appointed  in  the  United  States  and  for  what  purpose? 

CHAPTER  XVIII. 

Foreign  Exchange. 
Part  1. 

1.  What  developments  of  modem  business  caused 
the  establishment  of  foreign  departments  in  large  com^ 
mercial  houses? 

2.  Is  there  any  special  demand  for  young  men  with 
a  knowledge  of  foreign  exchange  and  foreign  ship- 
ping? 

3.  What  is  a  good  definition  of  foreign  exchange? 

4.  Why  is  the  system  of  exchanging  debts  through 
the  medium  of  commercial  paper  adopted? 

5.  What  items  are  charged  up  to  the  United  States 
as  an  offset  amount,  if  balance  of  foreign  trade  is  in 
its  favor? 

6.  Why  is  a  knowledge  of  the  monetary  system  of 
foreign  countries  desirable  for  a  young  business  man? 

7.  Is  paper  money  ever  accepted  for  its  full  face 
value  outside  of  the  country  from  which  it  emanates? 

8.  Is  it  ever  legal  tender  in  foreign  countries? 

9.  What  is  the  only  international  money,  and  why? 
10.    What  is  meant  by  the  "fineness"  of  gold  or  silver 

coins? 


QUESTIONS  FOR  REVIEW.  43^ 

11.  What  determines  the  value  or  price  of  the  gold 
money  of  account  in  commercial  countries? 

12.  Is  the  price  of  gold  affected  by  either  an  ab- 
sence or  a  scarcity  of  the  supply? 

13.  How  are  gold  shipments  between  the  United 
States  and  Europe  handled? 

14.  What  is  the  "fineness"  of  commercial  bars  of 
gold? 

15.  What  is  meant  by  "money  of  account"? 

16.  What  five  countries  are  now  comprised  in  the  La- 
tin Union? 

17.  What  is  the  actual  value  of  the  English  sove- 
reign in  American  money? 

18.  What  is  meant  by  sterling  exchange? 

19.  What  is  the  meaning  of  the  term  "rate  of  ex- 
change" ? 

20.  WTiat  is  the  difference  between  direct  and  arbi- 
trated exchange? 

21.  What  causes  contribute  to  the  fluctuations  in  the 
price  of  exchange? 

22.  How  can  the  par  of  exchange  between  any  two 
countries  be  determined? 

23.  What  is  the  commercial  par  of  exchange? 

24.  Give  a  simple  illustration  of  the  commercial  par 
of  exchange. 

25.  State  some  of  the  peculiarities  of  French,  Ger- 
man, and  English  quotations  on  exchange. 

26.  What  is   meant   by  the   newspaper   statement 
"foreign  exchange  closed  firm"? 

27.  What  is  meant  by  "selling  rates"  in  newspaper 
quotations? 


440  QUESTIONS  FOR  REVIEW. 

CHAPTER  XIX. 

Foreign  Exchange. 

Part  2. 

1.  What  is  the  basis  of  a  foreign  bill  of  exchange? 

2.  What  three  documents  are  comprised  in  a  foreign 
commercial  bill  of  exchange  ? 

3.  What  is  the  nature  of  the  bill  of  lading? 

4.  How  are  documentary  bills  of  exchange  usually- 
sent  abroad? 

5.  Does  the  duplicate  set  of  the .  three  documents 
serve  the  same  purpose  if  the  original  set  is  lost? 

6.  What  is  the  usual  custom  of  exporters  with  regard 
to  the  disposal  of  commercial  bills  of  exchange? 

7.  What  is  meant  by  stamping  the  draft  "Surrender 
documents  upon  payment  only"? 

8.  What  is  the  foundation  of  most  of  our  foreign 
exchange  transactions  and  the  principal  source  of  profit 
in  the  business? 

9.  What  is  the  advantage  to  manufacturers  of  the 
foreign  exchange  sj^stem? 

10.  What  is  meant  by  the  initials  "D.  A."  stamped 
upon  a  foreign  draft? 

11.  What  is  meant  by  "D.  P."? 

12.  What  inforriiation  should  be  obtained  before 
commercial  bills  are  bought? 

13.  What  are  hypothecation  certificates? 

14.  Does  the  same  rate  of  discount  apply  to  the  dif- 
ferent classes  of  commercial  bills? 

15.  Who  fixes  the  Bank  of  England  discount  rate 
and  how  often  is  it  fixed? 

16.  What  is  the  "private  discount  rate"  in  England? 


QUESTIONS  FOR  EEVIEW.  441 

17.  What  is  meant  by  "clean  bills'  of  exchange? 

18.  What  miscellaneous  charges  are  made  by  Euro- 
pean banks  in  connection  with  foreign  exchange  transact- 
ions? 

19.  What  are  the  special  requirements  of  importers 
in  Germany  with  regard  to  foreign  drafts? 

20.  Why  is  sterling  exchange  most  convenient  in 
the  transaction  of  European  business? 

CHAPTER  XX. 

Investments. 
1.     Can  all  business  enterprises  be  regarded  as  invest- 
ments? 

^     2.     What  is  the  more  restricted  meaning  of  invest- 
ments in  common  use? 

3.  From  what  sources  are  funds  obtained  to  pay  for 
new  issues  of  securities? 

4.  Can  bank  deposits  properly  be  considered  as 
"money  in  the  bank"?    If  not,  why  not? 

5.  What  percentage  of  all  business  transactions  is 
done  on  credit? 

6.  How  can  credit  be  defined? 

7.  What  has  been  the  effect  of  the  remarkable  ex- 
pansion of  credit  in  the  United  States  during  the  past 
few  years? 

8.  Upon  what  does  the  price  and  salabihty  of  secur- 
ities depend? 

9.  What  is  the  general  effect  of  public  confidence  on 
the  stock  and  bond  market? 

10.  Name  some  of  the  sources  of  funds  available  for 
investment. 


442  QUESTIONS  FOR  REVIEW. 

11.  What  constitutes  desirability  in  any  investment? 

12.  Into  how  many  divisions  may  the  different  kinds 
of  investments  offered  in  the  United  States  be  grouped? 

13.  How  are  government  bonds  chiefly  held? 

14.  Upon  what  does  the  payment  of  state  bonds  de- 
pend? 

15.  Can  states  and  municipalities  be  forced  to  pay 
their  bonds  through  the  courts? 

16.  What  is  the  distinction  between  speculation  and 
investment  in  the  purchase  of  real  estate? 

17.  Is  improved  property,  always  satisfactory  as  an 
investment? 

18.  What  should  an  investor  in  a  real  estate  mort- 
gage ascertain  before  parting  with  his  money? 

19.  Are  farm  mortgages  a  desirable  form  of  real 
estate  investment? 

20.  What  kind  of  corporation  bonds  have  absorbed 
capital  more  than  any  other  investment  in  this  country? 

21.  What  is  the  chief  guide  for  an  investor  in  rail- 
road bonds? 

22.  What  rule  is  it  desirable  to  observe  in  regard  to 
the  purchase  of  pubhc  utihty  bonds? 

23.  What  is  the  great  difference  between  bonds  and 
stocks? 

24.  What  class  of  stocks  has  come  into  special  prom- 
inence in  the  last  few  years? 

25.  How  should  an  investor  be  guided  in  the  pur- 
chase of  "industrials"? 

26.  Is  it  wise  for  an  investor  to  be  governed  by  the 
offer  of  large  interest? 

27.  What  is  the  safest  general  rule  for  investors  with 
regard  to  interest? 


QUESTIONS  FOR  EEVIEW.  443 

CHAPTER  XXI. 

The  Stock  Exchange. 

1.  What  is  the  economic  value  of  the  stock  ex- 
changes of  the  world? 

2.  Is  there  any  reason  why  stocks  and  bonds  should 
not  be  publicly  dealt  in  ? 

3.  What  is  the  distinction  made  on  the  London 
Stock  Exchange  between  "brokers"  and  "dealers"? 

4.  What  are  "room  traders"  on  the  New  York 
Stock  Exchange? 

5.  In  what  way  are  the  stock  exchanges  supposed 
to  guard  the  public  interest? 

6.  What  are  the  meanings  of  the  terms  "bull"  and 
"bear"? 

7.  What  are  "puts"  and  "calls"? 

8.  Describe  the  method  of  speculative  trading  on 
margins. 

9.  What  is  the  distinction  commonly  drawn  between 
a  syndicate  and  a  pool? 

10.  What  is  the  advantage  to  a  manufacturer  of  en- 
gaging brokers  to  buy  their  raw  material  for  them  ? 

11.  What  is  necessary  to  organize  a  stock  company? 

12.  How  is  the  transfer  of  a  certificate  of  stock 
made? 

13.  What  is  the  nature  of  the  preferred  stock  of 
a  corporation? 

14.  What  is  meant  by  treasury  stock? 

15.  What  is  the  signification  of  the  word  "limited" 
affixed  to  a  stock  company's  name? 


^D  05692 


